Linkage between Money and Prices: A Causality Analysis for Malaysia

Abstract

The main purpose of this paper is to examine the relationship between money and prices in Malaysia. This research considers monthly data of money supply M1, M2 and M3 and consumer price index (CPI) from January 1974 to September 2006. The Johansen cointegration method suggests that there is a long-run equilibrium relationship between money supply with prices. Toda-Yamamoto causality tests find that there is uni-directional causality running from money supply to CPI. Therefore, the empirical evidence from Malaysia supports the quantity theorist's view.