The Impact of Money Supply on Inflation in Malaysia : a Time Series Analysis

Lia, Jia Xing (2026) The Impact of Money Supply on Inflation in Malaysia : a Time Series Analysis. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the impact of money supply on inflation in Malaysia, with additional consideration of unemployment, GDP growth, and the exchange rate, using annual time series data from 1983 to 2023. As inflation remains a key concern for Malaysia’s economic stability, identifying its macroeconomic determinants is crucial for policy formulation. The main objective is to examine both the short-run and long-run effects of money supply and other key variables on inflation. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed, given its suitability for small samples and variables integrated at different orders. The results reveal that in the short run, unemployment, GDP growth, and the exchange rate significantly influence inflation, whereas money supply does not exhibit a statistically significant effect. The negative and significant error correction term confirms the existence of a stable long-run relationship. However, in the long run, none of the variables, including money supply, are found to significantly affect inflation. These findings suggest that inflation in Malaysia is predominantly driven by short-run shocks rather than persistent monetary trends. Policymakers should therefore prioritise short-run stabilisation measures such as targeted fiscal policies, labour market interventions, and exchange rate management while continuing to monitor monetary aggregates to safeguard overall macroeconomic stability