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TABLE OF CONTENTS CHAPTER 1 : INTRODUCTION

1 1.1 1.2 Background of Study Problem Statement Objective of Study 1.2.1 General Objective 1.2.2 Specific Objective 1.3 Significant of The Study 1.3.1 Researcher 1.3.2 Other Researcher and Student 1.3.3 Employers and Public 1.4 1.5 Scope of Study Limitation of The Study 1.5.1 Time Frame 1.5.2 Selected Variable 1.5.3 Limitation of Sources and Information 8 8 7 4 6 6

Chapter 2: LITERATURE REVIEW 2.0 2.1 2.2 2.3 Literature Review Inflation Rate Level and Demand for Money Interest Rate Level and Demand for Money Exchange Rate Level and Demand for Money 10 11 13 15

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Chapter 3: RESEARCH METHODOLOGY 3.0 3.1 3.2 3.3 3.4 3.5 3.6 Introduction Theoretical Framework Data Collection Data Description Research Variable & Measurement Hypothesis The Regression Model 3.6.1 Multiple Regression Analysis 3.6.2 Regression Coefficient 3.6.3 Coefficient of Determination 3.6.4 F-Statistic (F-Stat) 3.6.5 T-Statistic (T-Stat) 16 17 18 18 18 19 20 21 22 22 23 25

CHAPTER 4 : FINDINGS AND DATA ANALYSIS


4.0

Findings and Data Analysis Regression Analysis

27 30

4.1

CHAPTER 5 : CONCLUSION AND RECOMMENDATION 5.0 5.1 5.2 Introduction Conclusion Recommendation 37 37 39

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LIST OF TABLES

Table:

Page

Table 1: Data Collection Table 2: Linear Regression Table 3: Correlation of Variable Table 4: Descriptive Statistic Table 5: Graph

28 31 33 35 36

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CHAPTER 1 INTRODUCTION

1.0 BACKGROUND OF STUDY


Term of money means something generally accepted as medium of exchange or payment of goods and services as well as payment of a debt. Money was introduced to overcome the problems encountered in the barter economy system. Characteristic of money to be generally accepted, the value is stable, easily change into small units, durable and easily carried and stored. Bases on the definition and characteristics of current money, many things have been used as a currency value such as check, bank drafts and others. Role of money is a medium of exchange, measure of value, store of value of deferred payment. Most important role of money is as the medium of exchange, where it refers to the things that can be used to buy goods and services or a trade and debt payments as long as it received by the counterparties. The existence of a generally accepted medium of exchange eliminates weaknesses; through barter transactions make it easy trade-based economy means specialization and exchange. This is because money reduces transaction costs and saves time. Besides that, role of money as a standard measure of value or unit of account. Many provide measurement the value of a variety of different goods and services. It also provides a method for comparing the value of certain good or services specified in the value of a particularly currency. Hence, money solves the problem of determining relative price easily and quickly.

Next role of money is as a store of value. It refers to the ability of the good to retain its value for a period of time. Briefly the purchasing power of money restoring an item over time. Money can be saved and used to buy goods and services in the future.

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Demand for money is the quantity of money held by the public. Determination of the demand for money is strongly influenced two important characteristics of money, namely liquidity and low return. As the money is the most liquid asset, people choose to hold money, especially for trading purpose or conduct a transaction. Instead, the decision to hold the money did not provide any returns than other asset holdings for cash (including demand deposits) does not produce any returns. Hence, the demand for money is a consideration of individual liquidity providers (need money) with other asset returns. Besides liquidity, the demand for money also influenced income interest rate and price level. The main theory demand for money can be divided into two, namely Classical theory of money demand and theory Keynes of money demand. According Keynesian theory of demand for money (1936), demand for money is to meet three objectives, namely for the purpose of the transaction, vision and speculation. Keyness ideas do not recognize that money is also get a return in the for of interest rate, inflation rate and exchange rate. So that, the study focused on the relationship between interest rate, inflation rate, and an exchange rate with the demand for money in Malaysia. All of the variables based on monthly basis from 2007 until 2011 (60 months). The researcher selects the variables of interest rate, inflation rate and exchange rate in order to study on the relationship between all of the variables with the demand of money since six years ago. Researcher used these variables because these variables are the main measurement and the most popular economic factors. In this study the researcher tries to find whether these variables affect much on the demand for money in Malaysia or not.

1.1

PROBLEM STATEMENT
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This research is conducted in order to examine the relationship between economic variables with the demand of money in Malaysia based on monthly basis within the year of 2007 to 2011 (60 months). The data that the researcher took was in monthly basis. The problem of this research is to find what are the macroeconomic variables of Malaysia economic factor that will give effect on the demand of money? Therefore, the variables such as Interest Rate Level, Inflation Rate Level and Exchange Rate Level will be used. The researcher also wants to see whether there is a factors influencing demand for money from time to time.

1.2

OBJECTIVE OF THE STUDY

1.2.1

GENERAL OBJECTIVE Basically, the general objectives of this study are to identify the relationship between

interest rate level, inflation rate and exchange rate with demand for money in Malaysia within the year of 2007 until 2011.

1.2.2

SPECIFIC OBJECTIVE Specifically there are several objectives that have been identified to conduct this

research, which are:

1. To investigate the impacts between Interest Rate and Demand for Money in Malaysia. 2. To investigate the effects between Inflation Rate and Demand for Money in Malaysia. 3. To see the relationship between Exchange Rate and Demand for Money in Malaysia.

1.3

SIGNIFICANT OF THE STUDY


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1.3.1

Researcher
This study will help to increase the knowledge and understanding of the researcher

regarding the topic studied. This research could provide guidelines to the researcher in conducting other research in the future. In addition, this research could help the researcher to develop his or her personal confidence and enhance their research skills.

1.3.2 Other researchers and students


It is hope that this research can help other researchers and students by providing them with the relevant information and could be a reference to them in their future research. In addition, this will help them to expand their knowledge and understand this topic clearly. Through this research, other researchers and students can do a comparison and analyze the data that the researcher did. By doing that they will know what is the relationship this economic variable with demand for money in Malaysia.

1.3.3 Employers and publics


This research will be beneficial to the employers and publics that wanted to gain more knowledge about the factors that contribute to the demand for money in Malaysia. Through this research also the employers and publics will be exposed more about the determinant of how much economics variables give effect to demand for money in Malaysia. Through this research, employers and public can enhance knowledge and will know the main factors that will contribute demand for money in Malaysia and will be beneficial for both sides.

1.4

SCOPE OF STUDY

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This paper contains the examination of the relationship between Interest Rate of Interbank in Malaysia, Inflation Rate in Malaysia between the year of 2007 until 2011, and Exchange Rate (US exchange RM) in Malaysia with the Demand for Money in Malaysia. The demand for money (M1) is the dependent variable and Interest Rate, Inflation Rate and Exchange Rate is the independent variables for this research. In order to analyze the finding of this research, data of each variable are obtained from the DataStream of Universiti Teknologi MARA, Shah Alam. Data obtained are base on time series for 5 years on monthly basis starting from 2007 until 2011. All data gathered are to study the impact of several economic factors in demand for Money in Malaysia. The researcher only focuses to study the relationship between Interest Rate in Malaysia, Inflation Rate in Malaysia, and Exchange Rate in Malaysia with the Demand for Money in Malaysia. Therefore all the variables in this study are base from Malaysia only.

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1.5

LIMITATION OF THE STUDY

There are several limitations arises during conducting this study. Some of the limitations are:

1.5.1

Time Frame
The process of gathering information required longer time to ensure the information

are relevance and valid. The researcher only focus the study on 5 years data only start from 2007 until 2011.Therefore with limited and small of time frame that have been used, the result of this research might differ from previous researches.

1.5.2 Selected Variables


There are several macroeconomic variables that might be influenced by others factors, but this study will cover several macroeconomics and microeconomics variables such as Interest Rate in Malaysia, Inflation Rate in Malaysia, and Exchange Rate in Malaysia with the Demand for Money in Malaysia.

1.5.3 Limitation of Sources and Information


This study uses secondary data as the main sources. Therefore, the result obtained depending on the accuracy and reliability of the published data and also sources from Internet. The literature review also are getting from a few of journal only, therefore the result obtained may differ from previous researches. The entire selected variable is only a quantitative variable that can be measured. The qualitative variable such as people opinion or mentality is not included because these types of variable cannot be measured.

CHAPTER 2
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LITERATURE REVIEW

2.0

LITERATURE REVIEW
Literature review is the documentation of a comprehensive review of the published

and unpublished work from secondary sources of data in the areas of specific int erest to the researches. This section contains a short review on some research work done by earlier researchers. It will also ensure the important variables that are likely to influence the problem situation are not left out of study.

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2.1 INFLATION AND DEMAND FOR MONEY


According to the study by Irfan Civcir,(2003), the aim of this paper is to model the empirical relationship between broader definition of money, real income, interest rates, inflation and expected exchange rate and to examine the constancy of this relationship, especially in the light of financial reform, deregulation of financial markets and

financial crises. The no constancy o f

estimated

relationship n o t o n l y invalidates

forecasting and policy simulation, but also presents economic and statistical difficulty in conducting any inference from the estimated relationship. Therefore, stability of the relationship in both long - and short-run are investigated. At the initial period of the reform program of 1980, inflation is reduced to around 30 percent, but between 1988 and 1993 it fluctuated around 70 percent. With the surge of financial crises at the beginning of 1994 inflation reached three digit levels. A stand -by agreement with IMF and the re-functioning of the domestic debt market helped to reduce the strength of the crises, and inflation started to decline. After 1995 it fluctuated around 75 percent per annum. The main factor behind the inflationary pressure in Turkey is the lack of fiscal discipline combined with monetary financing and/or domestic debt financing of budget deficit. Under high inflation and instabilities in the financial market, the Turkish authorities aimed at placing greater reliance on monetary policy for stabilization purposes after the second half of 1980s. However, the central bank is not completely autonomous and economic policy decisions are taken at government level so it has been difficult to follow a clear anti-inflationary policy.

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Besides, Domowitz and Elbadawi,(1987), , state that, they postulate that the longrun demand for nominal money is a function of the price level, income, the exchange rate, and the rate of inflation. They then use an error-correction modeling technique to

estimate the short-run and long-run elasticities.

Instead of that, Muhd Zulbhikri Abd Majid (May 2004) implies that in the long-run real money demand are positively related to income and inflation.

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2.2 INTEREST RATE AND DEMAND FOR MONEY


According to Irfan Civcir,(2003), says that in response to these developments, private sector has responded by requesting higher real interest rates on government securities and by increasing its foreign exchange holding of foreign currency. Turkish residents hold a considerable part of their financial wealth in German mark or US dollar.

Mundell(1963), argued that in addition to the interest rate and income, the demand for money is likely to depend upon the exchange rate. Therefore, an important feature of this study is, firstly, to conduct a specific test using the likelihood ratio (LR) test proposed by Johansen and Juselius (JJ) (1990) whether the exchange rate can be considered as an additional determinant of the demand for money in Malaysia.

According to Poole (1970) policy makers should target the rate of interest if the LM curve is not stable and the level of money supply if the IS curve is unstable. However, instability in LM is largely caused by the instability in the money demand function. Therefore, it is important to test for the stability of the demand for money. Furthermore, following the financial reforms of the mid-1980s, many developed countries have switched to interest rate targeting when their money demand functions became not stable. Unfortunately, many developing countries have also started targeting the rate of interest, even though there is no significant evidence that their money demand functions have become unstable. Consequently, there have been a large number of empirical studies, in both the developed and developing countries, to re-estimate demand for money and to investigate, afresh, its stability; see Sriram(1999) and Rao and Kumar (2009) for details.

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Rup Singh and Saten Kumar(2010) indicate that income elasticity in these countries are close to unity, except for the PNG where it is higher, and the interest rate elasticity are negative, well determined and significant.

Tobin(1999) concluded that the demand for money is sensitive to interest rates when he found a clear-cut inverse relationship between interest rates and idle balances. Additional empirical evidence on the demand for money strongly confirms Tobins finding.

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2.3 EXCHANGE RATE AND DEMAND FOR MONEY


Mundell(1963) argued that in addition to the interest rate and income, the demand for money is likely to depend upon the exchange rate. Therefore, an important feature of this study is, firstly, to conduct a specific test using the likelihood ratio (LR) test proposed by Johansen and Juselius (JJ) (1990) whether the exchange rate can be considered as an additional determinant of the demand for money in Malaysia.

Thus, The Johansen-Juselius (1990) likelihood ratio tests strongly support the importance of exchange rate in M2 but not in M1 money demand function in Malaysia

Rehman (2005) found that the demand for money (M2) in Pakistan has a positive relationship with real output and the exchange rate if depreciation is anticipated, then the exchange rate has positive influence on the money demand (Bahmani-Oskoee and Pourheydarian, 1990)

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CHAPTER 3 RESEARCH Methodology


3.0 INTRODUCTION
In this chapter, researcher will include the procedures, theoretical framework, hypothesis and methodology used for the purpose of this research. The theoretical framework will show the variables and the literature review related to it. On the other hand, the hypothesis will explain the relationship between the independent variables and the dependent variables.

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3.1 THEORETHICAL FRAMEWORK

3.1.1 Diagram of dependent and independent variables

INDEPENDENT V ARIABLE

DEPENDENT VARI ABLE

INTEREST RATE

INFLATION RATE

DEMAND OF MONEY

EXCHANGE RATE

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3.2 DATA COLLECTION


Sources of Data External Sources: Journals, article on related issues. Library research at Universiti Teknologi Mara and, Datastream, journals.

3.3 DATA DESCRIPTION


This study will concentrate on monthly data of inflation rate, exchange rate and interest rate with the demand for money in Malaysia. It will focus on the period of 5 years starting from 2007 until 2011.The data will be taken from Data Stream from UiTM Library.

3.4 RESEARCH VARIABLE AND MEASUREMENT


DEPENDENT VARIABLE & INDEPENDENT VARIABLE For this study, there are only one dependent variable and the three independent variables. The variables are interest rates, inflation and the exchange rate. The dependent variable is the demand of money in Malaysia. The study will focus on the relationship between all the variables which is the main measurement of economic factors and demand for money in Malaysia whether all the dependent variables are related to each other or not.

3.5 HYPOTHESIS
Several testable statement or hypotheses can be drawn from the theoretical framework. It consist of Null Hypothesis (H0) where there is no correlation between two variables and the relationship is equal to zero and Alternate Hypothesis(H1) where there is exact relationship between the two variables.

Hypothesis 1 HO: There is insignificant relationship between interest rate and demand of money. H1: There is significant relationship between interest rate and demand of money.

Hypothesis 2 HO: There is insignificant relationship between exchange rate and demand of money. H1: There is significant relationship between exchange rate and demand of money.

Hypothesis 3 HO: There is insignificant relationship between inflation rate and demand of money. H1: There is significant relationship between inflation rate and demand of money.

3.6 THE REGRESSION MODEL

The multiples Regression Analysis will be used to examine the relationship between the Independent Variable (the determinant factor) which is real income, interest rate, inflation rate and exchange rate with the Dependent Variable which is the demand of money in Malaysia. The researcher will use the E-views 7 software to analyze and interpret the findings. Eview is an integrated set of computer program that is invaluable to the researcher. Included in this package are the procedures of various types of regression and the correlation analysis, analysis of variance, discrimination analysis and factor analysis. The result of the data will be in the form of simple regression, multiple regression, standard deviation, mean, coefficient correlation, coefficient of determinant, F-statistic and Ttest.

3.6.1 Multiple Regression Analysis.

Regression Equation Demand of Money= f (INT, EXC, INF)

Mathematically Equation Y = + 1X1 + 2X2 + 3X3 +

Y = + 1INT+ 2 EXC+ 3 INF+

where ; Demand of Money C b1, b2, b3 INT INF EXC e (Y) = = = = = = = Dependent Variable Constants Regression Coefficient Interest Rate Inflation Rate Exchange Rate Error Term

3.6.2 REGRESSION COEFFICIENT

It used to estimates the changes in the dependent variable per unit in the independent variables. These statistical tools will determine coefficient in behavior of the four variables (INT, EXC, and INF).

3.6.3 COEFFICIENT OF DETERMINATION (R )

The coefficient of determination is donated by R . Its used to determine how well the regression fits the data. The value of R ranges from 0 to 1. If the value is 0, it shows that none of the variables explain the changes in dependent variables. If the value is 1, it shows that all the changes in the dependent variable a re explained by the variation in independent variables used in the regression. Therefore a value closer to 1 is preferred.
2

2.

R Squared can be measured by:

2=

Total explain Variation

Total Variation

3.6.4 F- STATISTIC (F-STAT)

The researcher uses this kind of test in order to know the reliability of the overall model. F- Statistic provides an overall appraisal of the regression equation to evaluate the significance of each variable to the entire regression model. F-Statistics is used to test the hypothesis that variation in the independent variables explained a significant portion of the variation in the dependent variable.

F- Value can be measured by:

Explained Variation / (k-1)

Unexplained Variation / (n-k)

where; F k n = = = Critical Value No. of Independent Variable No. of Observation

The computed f-value will be compared with F distribution table and the result will be determined by:

Computed F-Value F Critical Value

Accept H1

Computed F-Value F Critical Value

Reject

3.6.5 T STATISTIC (T-STAT)

T-statistics is used in t-test to determine if there are significant relationship between dependent and independent variables. To determine if there is significant relationship between dependent and independent variables, the computed t-value with the value of tdistributed table is compared. The T-distribution table is calculated below.

H0 H1

= =

0 =0

T- Distribution table can be measured by: d.f Where; d. f k n = = = Degree of Freedom No. of Independent Variable No. of Observation. = (N k 1)

1)

If t-value > t-distributed/tabulated

It indicates that there is a significant relationship between the dependent variables and independent variables. Therefore accept H1, by rejecting H0

2)

if t-value > t-distributed/tabulated

it indicates that there is a insignificant relationship between the dependent variables and independent variables. Therefore accept H0, by rejecting H1 Or Computed T-Value Computed T-Value > < T Critical Value T Critical Value Accept H1 Reject H1

Chapter 4

FINDINGS AND DATA ANALYSIS


4.0 FINDINGS AND DATA ANALYSIS In this chapter, the findings of the research will be analyzed. All data gathered has been analyzed using E-Views software. The data gathered in this research is to analyze the relationship between dependent variable and independent variable whether positive relationship or negative relationship. Other than that, this research is also to calculate the coefficient of determination (R2), which is to determine how well the regression line fits the data and to calculate the T-statistic (Tstat). T-Stat is to determine if there is significant relationship between the dependent variable and independent variables. Furthermore, the other purpose of gathering the data in this research is to calculate the F-statistic (F-stat). The function of F-stat is to determine on how reliable the overall model. It provides and overall appraisal of the regression equation to evaluate the significant of each individual component of the entire regression model.

The amount of data collected for Demand for Money in Malaysia, Interest Rate Level, Exchange Rate Level and Inflation Rate are as stated below:

Table 1 : Data Collection

MONT HS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

M1 5.159567 494 5.174264 544 5.160083 588 5.167517 301 5.174614 176 5.174206 681 5.182674 809 5.188327 364 5.193943 14 5.201453 934 5.200364 79 5.227905 721 5.244499 779 5.236917 984 5.239431 124 5.230602 941 5.231157 52 5.245277 937

IR 6.57 6.54 6.54 6.44 6.44 6.49 6.34 6.35 6.3 6.26 6.31 6.29 6.27 6.27 6.21 6.19 6.13 6.08

ER 3.51 5 3.49 6 3.51 62 3.44 93 3.42 3.41 65 3.45 15 3.47 33 3.50 9 3.40 55 3.35 25 3.34 3 3.28 35 3.23 15 3.16 85 3.19 3 3.14 8 3.25 85

INFR 3.1 3.2 3.1 1.5 1.5 1.4 1.4 1.6 1.9 1.8 1.9 2.3 2.4 2.3 2.7 2.8 3 3.8

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

5.243606 974 5.241847 693 5.254449 945 5.237187 964 5.245981 502 5.262563 802 5.264469 304 5.253390 35 5.254498 289 5.261548 101 5.269975 478 5.268579 844 5.268984 932 5.274626 311 5.282017 259 5.281016 996 5.301525 677 5.303015 82 5.308562 279

6.02 5.98 5.96 6.01 5.98 5.86 5.77 5.16 5.11 5.02 5.04 4.96 4.9 4.91 4.91 4.91 4.83 4.85 4.85

3.26 75 3.27 65 3.45 8 3.48 3 3.54 3 3.63 75 3.49 85 3.60 75 3.72 3.55 25 3.54 05 3.49 45 3.53 65 3.49 5 3.53 05 3.44 1 3.40 72 3.38 3 3.38 75

7.7 8.5 8.5 8.2 7.6 5.7 4.4 3.9 3.7 3.5 3 2.4 -1.4 -2.4 -2.4 -2 -1.5 -0.1 1.1

38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56

5.315040 758 5.303546 593 5.298561 849 5.315889 773 5.320237 084 5.312989 312 5.331263 064 5.329308 163 5.328515 987 5.342350 819 5.350991 886 5.380163 286 5.368790 263 5.360520 141 5.363615 364 5.369274 502 5.379196 704 5.371948 125 5.387136 651

4.96 4.93 5.01 5.05 5.19 5.22 5.19 4.99 4.85 4.91 4.95 4.96 4.95 4.97 4.94 4.93 4.88 4.89 4.89

3.44 15 3.36 7 3.21 2 3.25 3.27 3.21 9 3.15 05 3.11 3 3.08 95 3.08 33 3.14 5 3.07 2 3.04 35 3.02 95 3.02 55 3.00 05 2.99 75 3.00 5 3.01 05

1.3 1.2 1.3 1.5 1.6 1.7 1.9 2.1 1.8 2 2 2.2 2.4 2.9 2.8 3.2 3.3 3.5 3.4

57 58 59 60

5.383685 956 5.395037 233 5.398340 591 5.411972 217

4.89 4.88 4.91 4.83

2.98 75 3.18 5 3.12 25 3.13 75

3.3 3.4 3.4 3.3

4.1

REGRESSION ANALYSIS

Regression analysis was chosen as it fits well for hypothesis testing and analyzing how independent variables can be used to predict a dependent variable. According to Malhotra (2006), Regression analysis is a powerful and flexible procedure for analyzing associative relationship between dependent variable and one or more independent variables. Fitness of the model built for this study is examined by this kind of standard regression analysis. The analysis shows how much of the total variance in the dependent variable that is the demand for money is possible to explain by the independent variables which is interest rate, exchange rate and inflation rate. The researcher prefers regression analysis to test hypothesis because regression analysis can be used to determine whether the independent variables explain a significant variation in the dependent variable to find out whether the relationship exists or not.

Table 2 : Linear Regression

Dependent Variable: M1 Method: Least Squares Date: 12/08/12 Time: 12:22 Sample: 1 60 Included observations: 60 Variable C IR ER INFR R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 6.203427 -0.08167 -0.147234 0.005063 0.934303 0.930784 0.018258 0.018669 157.1211 265.4663 0.000000 Std. Error 0.041005 0.004174 0.013243 0.001106 t-Statistic 151.2856 -19.56555 -11.11798 4.576382 Prob. 0.00000 0.00000 0.00000 0.00000 5.280484 0.0694 -5.104036 -4.964413 -5.049421 0.897351

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

The above table shows the regression obtained by using Least Squared Method. From the above regression, the p-value for F-statistics is 0.0000 in which indicates that at 10% significant. From the table above also, we can say that the independent variables of interest rate, exchange rate and inflation rate significant to explain the dependent

variables at 5% significant level. It show that it reject null hypothesis. The linear regression analysis is presented in Table 2. The linear regression test of the model reveals that the R-squared of the model is 0.93. This means, 93% of the variation in dependent variable, demand for money (M1) can be explained by alls the independent variables. Meanwhile 7% cannot be explained. This means there were other factors and indicators that can be used to indicate the demand for money in Malaysia. The coefficient of correlation (R-squared) obtained from table 2 is 0.93 which is close to 1.0 that indicates as a positive linear correlation.

Table 3 : Correlation of Demand for Money, Interest Rate, Exchange Rate and Inflation Rate M1 1 -0.69245 -0.860762 -0.054021 ER -0.69245 1 0.358924 -0.031138 IR -0.860762 0.358924 1 0.30603 INFR -0.054021 -0.031138 0.30603 1

M1 ER IR INFR

Summary of correlation

1. Interest Rate INTEREST RATE 1.0 % DEMAND FOR MONEY - 0.860762%

The result shows that correlation of interest is -0.860762%. It means that if interest rate increase by 1%, the demand for money will decrease by 0.8608%. According to the explanation above, there is negative relationship between interest rate and demand for money.

2. Exchange Rate EXCHANGE RATE 1.0 % DEMAND FOR MONEY -0.69245%

The result shows that correlation of exchange rate is 0.69245%. It means that if exchange rate increase by 1%, the demand for money will decrease by 0.69245%. According to explanation above, there is negative relationship between exchange rate and demand for money.

3. Inflation Rate INFLATION RATE 1.0% DEMAND FOR MONEY -0.054021%

The result shows that correlation of Inflation Rate is -0.054021%. It means that Inflation Rate increase by 1%, the demand for money will also decrease by 0.054021%. According to the explanation above, there is negative relationship between Inflation Rate and Demand for Money.

Table 4 : Descriptive Statistic

Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability Sum Sum Sq. Dev. Observation s

M1 5.280484 5.26948 5.411972 5.159567 0.0694 0.06422 2.046923 2.312132 0.314722 316.829 0.284165

IR 5.487 5.08 6.57 4.83 0.648778 0.432158 1.400429 8.264172 0.016049 329.22 24.83386

ER 3.31413 3.34775 3.72 2.9875 0.194778 0.107905 1.859406 3.368822 0.185554 198.8478 2.23837

INFR 2.593333 2.4 8.5 -2.4 2.28576 0.533219 4.513726 8.571639 0.013762 155.6 308.2573

60

60

60

60

Table 4 shows the descriptive analysis of the data adopted in this study. The data has been used in this research were taken from year 2007 until 2011 by monthly. All data covered for Demand for Money as dependant variable, inflation rate, exchange rate and interest rate as independent variables. According to the table above, the maximum value for interest rate, exchange rate, and inflation rate is 6.57, 3.72 and 8.5 respectively. While for minimum value, interest rate, exchange rate, and interest rate is 4.83, 2.9875 and -2.4 respectively. The "mean" is the "average" of data that has been used to, where all the numbers are added up and then divide by the number of numbers. Overall, mean for each variable is positive, while for median, all variables give positive results also.

Table 5 : Graph of all variable

ER
3.8 3.6 Q u a n tile so fN o rm a l Q u a n tile so fN o rm a l 3.4 3.2 3.0 2.8 2.8 3.0 3.2 3.4 3.6 3.8 Quantiles of ER 10 8 6 4 2 0 -2 -4 -2 0

INFR

10

Quantiles of INFR

IR
7.5 7.0 Q u a n tile so fN orm a l 6.5 6.0 5.5 5.0 4.5 4.0 4.8 5.2 5.6 6.0 6.4 6.8 Quantiles of IR Q u a n tile so fN o rm a l

M1
280,000 240,000 200,000 160,000 120,000 80,000 140,000

180,000

220,000

260,000

Quantiles of M1

The graph shows that this model is quite good because the observation is almost
near to straight line. It is proved by the value R which is only 93%.

CHAPTER 5 CONCLUSION AND RECOMMENDATION

5.0

INTRODUCTION This final chapter consists of conclusion and recommendations regarding the

study. This chapter will review the overall study from all chapters including findings and analysis. Finally, recommendations for further research will be figured out.

5.1

CONCLUSION In brief, as stated in the earlier chapter, this study was conducted to identify the

relationship between Interest Rate, Exchange Rate and Inflation Rate with the Demand for Money in Malaysia. In order to know whether the Demand for Money in Malaysia is affected by the Interest Rate, Exchange Rate and Inflation Rate, a certain research methodology was employed. The research was carried out on monthly basis between the periods 2007 until 2011. From the study, the researcher found out that there is a negative relationship between Inflation Rate and Demand for Money in Malaysia. The findings are not same as the previous researcher that proved by the theory that stated by, Muhd Zulbhikri Abd Majid (2004) implies that in the long-run real money demand are positively related to income and inflation rate. The result of the study of the relationship between Exchange Rate and Demand for Money showed negative relationship. According to Mundell (1963) who argued that in addition to the interest rate and income, the demand for money is likely to depend upon the exchange rate. Therefore, an important feature of this study is, firstly, to conduct a specific test using the likelihood ratio (LR) test proposed by Johansen and Juselius (JJ) (1990) whether the exchange rate can be considered as an additional determinant of the demand for money in Malaysia. Thus, Rehman (2005) found that the demand for money (M2) in Pakistan has a positive relationship with real output and the exchange rate if

depreciation is anticipated, then the exchange rate has positive influence on the money demand (Bahmani-Oskoee and Pourheydarian, 1990). Researcher also found that there is inverse relationship between Interest Rate with the Demand for Money in Malaysia. From the study by Tobin concluded thah the demand for money is sensitive to interest rate when he found a clear-cut inverse relationship between interest rate and idle balances. Additional empirical evidence on the demand for money strongly confirms Tobins findings. Furthermore, according to Rup Singh and Saten Kumar (2010) indicate that income elasticities in these countries are close to unity, except for the PNG where it is higher, and the interest rate elasticities are negative, well determined and significant. Having examined the result from the regression model, the coefficient of determination (R2) was 92%. This value indicated that all the changes in the dependent variable can be explained by independent variables used in the equation and his mode accurate for forecasting purposes. Another concluding remark that can be made is with regards to test of hypothesis. In order to search for a significant relationship between the dependent variable and independent variable, the t-statistic and f-statistic were used. From the t-statistic result, Interest Rate, Exchange Rate and Inflation Rate show a significant result. So for the three independent variables, the researcher accept the Alternate Hypothesis (H1) where there is exact relationship between the two variables and the reject the Null Hypothesis (H0) where is no correlation between two variables and the relationship is equal to zero. This shows that any changes that may happen to the selected Independent variables could give impact to the movement or changes to demand for money.

From the study, f-statistic value was 204.4657 which is more than f-tabulated. This result showed that there was a significant relationship between the dependent variable and independent variable. As the f-statistic was a significant, the researcher accepts H1, and rejects the H0.

As an overall conclusion, the result indicates that if there is an increase in the Interest Rate and Exchange Rate, it will in the decrease of the Demand for Money due to the negative relationship between independent variables and dependent variable. This study overall has achieved the main objective of identifying relationship between all independent variables and dependent variable. This study has also examined the relationship between all the independent variables and dependent variable.

5.2

RECOMMENDATION Even thought every aspect and area had been taken into consideration, it is

believed this research paper may still have more reasonable doubts that may be worth looking into and require further study. In order for the research to be a more effective and efficient, the researcher would like to make several recommendations to the future researcher. It is recommended that the future researcher use other macroeconomic variables such as Price Level, Level of Income or Consumer Price Index as the Independent variables when doing the research about rising unemployment rate Malaysia. It has been proved that these macroeconomic variables do strongly affect the demand for money in Malaysia. Thus, when conducting the data, try to use longer period of study. Gathering information requires a longer time to ensure that the information is relevant and valid. Therefore, the data range should be extended longer, so that it can provide an accurate and solid outcome for the research. Other than that, it also suggested for researcher to determine carefully the proxy for independent variables, so that the result would not show a correlation between variables. Finally, the method used should be using various methods in order to the test the reliability of the result obtained. Instead of using Eview Granger Test other method such as Statistical Package for Social Science (SPSS)

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