Monetary Velocities in Malaysia: an Empirical Note

This paper has a dual objective of first assessing the stability of the income velocity of circulation of money and then relating its behaviour to real and monetary factors. Quarterly data from 1991.1 through 2006.1 are mobilised for the purpose with money defined as MO, M1, M2 and M3. The conventional unit root test techniques such as the Dickey-Fuller and the Phillips-Perron are found to be reliable in terms of yielding accurate inferences about the non stationary characteristic of the velocity. This follows the findings that the application of the Perron s innovational outlier model would similarly reveal that there is at least one unit root in all the data series. Moreover, seasonal unit roots are ruled out by the HEGY test. Variance decomposition provides evidence favouring Friedman s monetary uncertainty hypothesis in the case of narrower monetary aggregates while real output could wield substantial influence on the velocities of three of the four monetary aggregates. Monetary factors, specifically money growth variability, are more predominant than output in dictating velocities of narrower monetary aggregates