Inflation, money supply and economic growth: a causality analysis for Malaysia

It is without doubt that the persistent rise in the price levels of commodities and services adversely affects the economic performance of a country. Hence, the economic goal of every government is to maintain low and relatively stable levels of inflation. The empirical relationship between inflation, money supply and economic growth in Malaysia is tested in this paper by employing Cointegration and Granger-Causality test analysis. For this purpose, quarterly data on GDP deflator (P), money supply (M?) and Real GDP (Y) for the period at 1996-2011 are used. The findings revealed no existence of a cointegrating between variables in the series used. Therefore, the variables do not have a long-run relationship between them. Money supply was seen to Granger-Cause inflation. GDP appear to have a strong causal effect on the M2 as well as on prices level. In addition, the evidence of short-run unidirectional causality between money supply and general price level indicates that inflation is a monetary phenomenon in the short-run in Malaysia