Predictive powers of divisia monetary aggregates and simple sum money on inflation: comparative evidence from Malaysia

Lim, Kok Shyong. (2007) Predictive powers of divisia monetary aggregates and simple sum money on inflation: comparative evidence from Malaysia. [Final Year Project Report] (Unpublished)

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Abstract

The weaknesses of simple sum monetary aggregates in both aggregation theory and linkages to macroeconomic variables ultimately led to monetary targeting being replaced by other methods such as inflation targeting and interest rate targeting as monetary policy tools. However, innovation in monetary aggregation theory led to the introduction of Divisia monetary aggregates as analternative to simple sum money.By using a P-Star model framework in the context of Malaysia, this study investigates the performance of Divisia monetary aggregates in predicting inflation arymovements against their simple sum counterparts. The results showed that Divisia M1 is superior to other monetary aggregates used in this study to forecast future inflationary movements in Malaysia. In addition, the P-Star model of inflation is shown to be a valid empirical model to predict inflation for Malaysia.

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