Financial Liberalization and Money Demand in ASEAN Countries:
Implications for Monetary Policy
Robert Dekle and Mahmood Pradhan

 

Monetary developments in Indonesia, Malaysia, Singapore, and Thailand since the early 1980s have to be assessed in the context of substantial changes in their financial markets. This paper examines the extent to which financial market development and liberalization in these countries since the 1980s have affected money demand and seeks to draw implications for the operation of monetary policy.

An important prerequisite for operating a policy framework centered around monetary targets is a stable and predictable demand for money. However, consistent with a number of previous studies and with the recent experience of many industrialized countries, the paper's empirical results suggest that there is continuing instability in the relationship between money growth, economic activity, and inflation. This suggests that policymakers cannot rely exclusively on the behavior of monetary aggregates to assess monetary conditions. Policy decisions will need instead to be based on a wider set of monetary and real sector indicators of inflationary pressures.

The feasibility of alternative policy frameworks, including nominal exchange rate targets and inflation targets, is discussed in the context of the increasing integration of financial markets and the substantial increase in foreign capital inflows. Experience with the operation of inflation targets in other countries suggests that policy credibility is aided by the transparency of decision making.


Robert Dekle is an economist in the Central Asia Department of the IMF. He was previously with the Southeast Asia and Pacific Department. Prior to joining the Fund, he was an economist at the Board of Governors of the Federal Reserve System. He received his Ph.D. from Yale.

Mahmood Pradhan is an economist in the Southeast Asia and Pacific Department of the IMF. Prior to joining the Fund, he was an economist at the Bank of England. He holds an M.Phil. from the London School of Economics.

 

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