DETERMINANTS OF MONEY SUPPLY IN MALAYSIA

STUDENT NAME STUDENT ID

MOHD AIMAN HAIKAL BIN MOHD AZWARI 2021875486

IMRAN HAKIM BIN AHMAD SAIFUDDIN 2021868812

MUHAMMAD HAZRIL FARIS BIN MOHD LUTFI 2020898484

NURIN SABRINA BINTI ROSLI 2021485232

SITI NORMAISARAH BINTI AZMI 2021461638

TABLE OF CONTENT
ABSTRACT
1.0 INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 3
1.2 PROBLEM STATEMENT 5
1.3 RESEARCH QUESTIONS 6
1.4 RESEARCH OBJECTIVE 6
1.5 SCOPE OF THE STUDY 6
1.6 SIGNIFICANCE OF THE STUDY 7
1.7 LIMITATION OF THE STUDY 8
1.8 OPERATIONAL DEFINITIONS 8
1.9 CONCLUSION
9
2.0 LITERATURE REVIEW 10
2.1 INTRODUCTION 10
2.2 LITERATURE REVIEW (DEPENDENT VARIABLE) 10
2.3 LITERATURE REVIEW (INDEPENDENT VARIABLE) 11
2.5 CONCLUSION
17
3.0 RESEARCH METHODOLOGY 18
3.1 INTRODUCTION 18
3.2 MODEL 18
3.3 CONCEPTUAL FRAMEWORK 20
3.4 EXPECTED SIGNS 21
3.5 RESEARCH HYPOTHESIS 21
3.6 VARIABLE DESCRIPTIONS 22
3.7 DATA COLLECTION METHOD 24
3.8 MEASUREMENT FOR ANALYSIS 25
3.9 CONCLUSION 28
4.0 FINDINGS AND ANALYSIS 29
4.1 INTRODUCTION 29
4.2 DESCRIPTIVE STATISTICS 29
4.2 PEARSON CORRELATION 31
4.3 REGRESSION ANALYSIS 31
4.4 COEFFICIENT OF DETERMINATION (R-squared) 33
4.5 T-STATISTIC 33
4.6 F-STATISTIC 34
4.7 INTERPRETATION OF RESULT 34
4.8 CONCLUSION 36

5.0 CONCLUSION 37
5.1 INTRODUCTION 37
5.2 OVERVIEW 37
5.3 REVIEW 38
5.4 POLICY IMPLICATION 38
 5.5 LIMITATION OF THE STUDY 39
5.6 RECOMMENDATION 40

ABSTRACT

The notable and rapid increase in Malaysia's broad money supply has sparked concerns regarding
potential economic instability. This study investigates the factors driving this surge through a
multiple regression analysis of annual time-series data spanning from 1969 to 2022. The findings
indicate that the growth of money supply is significantly influenced by interest rates, exchange
rates, and reserve ratios, emphasizing the intricate interplay between monetary policy tools and
external factors.
 CHAPTER 1
INTRODUCTION
The money supply refers to the sum total of all of the currency and the other liquid assets in a
country’s economy on the date measured. It includes coins, bills, demand deposits of all kinds, and
other liquid assets that are in circulation in a nation at any particular time. It also includes all cash
in circulation and all bank deposits that the account holder can easily convert to cash. Moreover, it
includes all types of currency that are used for transactions and value storage by people,
companies, and governments. These various metrics are frequently used by monetary authorities
and central banks to assess and control the amount of money in an economy. A key component of
monetary policy is controlling the money supply since it has an effect on interest rates, inflation,
and general economic stability. According to the Reserve Bank of Australia, (2023) stated that
monetary policy has a strong influence over interest rates in the economy, including the lending
and deposit rates faced by households and businesses. In turn, these interest rates influence
economic activity, employment and inflation.
The money supply plays several different roles, including influence on prices, monetary policy
tools, and economic indicators. The purpose of an economic indicator is that variations in the
money supply can affect interest rates, inflation, and the stability of the economy as a whole. They
are a sign of economic trends. To affect the money supply, they can change reserve requirements,
interest rates, and open market activities. Therefore, an increase in the money supply has the
potential to cause inflation if it outpaces growth in the output of goods and services. “inflation is a
purely monetary phenomenon” (Friedman & Schwartz, 1963) in the sense that an increase in
money supply causes inflation.
Similarly, when the money supply expands, it increases the amount of money available for
individuals and businesses to spend, invest, and borrow indirectly. Because of this, economic
growth is also able to significantly increase the money supply in the short run based on the work
by Muhammad Lokman Hakimi (2021). It states that the monetary policy direction determined the
money supply in a specific economy in order to influence economic activities. To limit inflation,
the money supply influences interest rates through bond sales and purchases. Monetary policy is

1
classified into two types which are contractionary and expansionary. By implementing
expansionary monetary policy, the central bank will buy debt securities and bonds to expand
money supply and drop the interest rate.
In scenarios of inflation, a contractionary monetary policy is typically adopted. This approach
aims to decrease the money supply, leading to higher interest rates. By doing so, it curbs excessive
aggregate demand, helping to alleviate inflationary pressures and stabilize prices. Conversely,
during economic downturns or recessions characterized by high unemployment, an expansionary
policy is often favored. Increasing the money supply under this policy encourages higher
consumption and investment. Consequently, this can help in reducing unemployment rates by
stimulating economic activity and demand for goods and services (Muhammad Lokman Hakimi,
2021).
On the other hand, the amount of money available in an economy or money supply is important
because it can affect prices, spending, and overall economic stability. Increasing the money supply,
like how Malaysia did during the pandemic, can be good for the economy in the short term. It
makes borrowing cheaper for businesses and individuals, encouraging spending and investment.
This can boost economic growth. However, too much money in circulation can also lead to
problems. Prices might rise faster than wages, causing deflation (where prices generally fall) and
hurting people's buying power. The money supply of one nation can impact other nations as well.
For instance, other currencies may become more affordable in relation to the Malaysian ringgit if
Malaysia has significantly more money than its neighbors.This may increase the cost of Malaysian
exports and affect the country's trade.

2
1.1 BACKGROUND OF THE STUDY
The money supply is the total quantity of cash and other liquid assets that are in circulation in
an economy at any one time. The money supply is commonly separated into three categories such
as M1 supply (narrow money), M2 supply (quasi-money + M1) or broad money, and M3 (broad
money + M2), despite the existence of several other types of monetary aggregates. Narrow money
represents the most liquid forms of money, consisting of assets that can be quickly converted to
cash and M2 is a more comprehensive measure of the money supply that takes into account some
near-money or quasi-money assets in addition to demand deposits and physical cash (M1). All the
elements of M2 plus bigger time deposits, institutional money market funds, and other larger liquid
assets make up M3, an even more comprehensive measure of the money supply. For instance, the
sum of short-term time deposits, long-term deposits, and narrow money is known as broad money
which is M3. Coins, notes in circulation, and other money equivalents that may be swiftly changed
into cash are examples of (M1) narrow money. Furthermore, examples of quasi money include
gold certificates, bonds issued by creditworthy governments and certificates of deposit issued by
creditworthy banks. Most central banks focus on monitoring and managing the broad money in the
system because they believe it to be the most encompassing method of determining the quantity of
money in an economy (Mohamed Imthinan, 2019).

3
 Chart 1.2: Money Supply in Malaysia from 2013 to 2022
The Chart 1.2 illustrates annual trends based on monthly data for money supply from 2013 to
2023. The data, collected on a monthly basis, has been aggregated to provide a comprehensive
overview of the yearly patterns and fluctuations in money supply. This visualization aims to
highlight key insights and trends that emerge when examining the data on an annual basis.
According to the Bank Negara Malaysia (2023), Malaysia's money supply increased steadily
between 2013 and 2023, partly due to Bank Negara Malaysia's liberal monetary policies, which
were designed to boost economic development in the face of global concerns, however, the
subsequent years, especially after 2020, posed new challenges with the onset of the global
pandemic, prompting shifts in both fiscal and monetary strategies to mitigate economic
disruptions. Despite that, the highest is in 2023 for three categories of money supply that is M1,
M2 and M3. The highest amount of M1 is RM7,185,110.3 million in 2022 and the lowest amount
of M1 is RM3,634,420.8 million in 2013. The difference between them is RM3,550,689.5 million
and it means the money supply for M1 has increased from 2013 until today. M2 and M3 also
increase continuously and have the same patterns with the highest of M2 being RM26,652,928.5
million. The spread between M2 is RM9,878,820.3 million because the lowest in M2 was

4
RM16,774,108.2 million in 2013. The lowest of M3 is RM1,375,858.01 million was recorded in
2013 and rose to RM 26,745,659.0 million in the next ten years. The difference between them is
RM9,772,785.8. The changes of M1, M2, and M3 from the lowest quantity to the highest quantity
is by 97.70 %, 58.89 % and 57.58 % respectively.
Subsequently, Money supply information is normally recorded by the legislature or the national
bank of the nation. The control of the money supply is a significant arrangement apparatus in
leading the financial strategy of a nation. Increasing money supply will make a change in rate of
interest, reserve ratio , inflation rate, GDP and exchange rate. It is supported by Sheikh Abdul
kader et all., (2020) stated that throughout the years, the increase in money supply is associated
with an increase in real GDP, rate of inflation, rate of interest, and depreciation of exchange rate.

1.2 PROBLEM STATEMENT

The exponential surge in Malaysia's broad money supply has become a cause for significant
concern. Over the span of just three years, from 2019 to 2022, there was a staggering escalation of
17.03%, catapulting the monetary volume from RM 22.9 trillion to a towering RM 26.8 trillion
(Bank Negara Malaysia, 2023).
The increment of money supply happens due to implementation of monetary policy. The
authority body which is the Central Bank will regulate this policy through interest rate, open
market operation and reserve requirement to control the amount of money in circulation. These
tools are able to expand the money creation. Generally, if the bank has more money available to
lend, thereby potentially escalating the money supply in the economy (Ion & Simion, 2015).
The excess of money supply and credits eventually lead to economic challenges which is
inflation where the cost of goods and services become more expensive. It will lead to uncertainty
in planning. Elevated and erratic inflation introduces uncertainty for both businesses and
consumers. Anticipating future prices and expenses becomes intricate, affecting decisions about
long-term plans, investments, and overall economic steadiness. Besides, the potential for economic
instability will exist. Prolonged periods of high inflation can destabilize an economy by fostering
speculative behavior, disrupting how resources are allocated, and eroding trust in the currency.
Hence, potentially leading to economic instability. Reportedly, the inflation rate in Malaysia rose to
3.3 % in 2022 compared to 0.6 % in 2019 (Department of Statistics Malaysia, 2023). Therefore,

5
the determinants of money supply should be investigated which are helpful to predict the economy
behavior. This involves a thorough assessment of the issues that directly influence a money supply
in Malaysia.

1.3 RESEARCH QUESTIONS

This study is to determine what factors could affect the money supply in Malaysia. Independent
variables such as interest rate, Gross Domestic Product (GDP), exchange rate, reserve ratio and
inflation rate are selected to investigate the relationship between each variable towards money
supply in Malaysia. Hence, research questions suggested as below:
● What is the factor in determining the money supply in Malaysia ?
● What is the most significant factor that can influence the money supply in Malaysia ?

1.4 RESEARCH OBJECTIVE

This research objectively wants to evaluate the relationship between interest rate, GDP, exchange
rate, reserve ratio and inflation rate towards money supply in Malaysia. The research objectives are
precisely as follow:
● To investigate the factors that influence the money supply in Malaysia
● To determine the most influencing factor toward money supply in Malaysia.

1.5 SCOPE OF THE STUDY

The scope of this study is to determine the factors that have the most impact on the money
supply. This study was conducted in Malaysia and money supply was selected as the dependent
variable. Money supply had emerged as one of the primary concerns in Malaysia due to the
increase during the previous four years which had affected the economy in this country. Therefore,
five independent variables have been selected namely interest rate, gross domestic product (GDP),
exchange rate, reserve ratio and inflation rate to investigate how they can impact the expansion of
the money supply in Malaysia. This study involves secondary data where all data use existing
references by the World Development Indicator and Bank Negara Malaysia’s website. All the
financial data will be analyzed annually from the year 1969 to 2022 which is of 54 observations .

6
1.6 SIGNIFICANCE OF THE STUDY
This study is expected to have a importance on all parties including policy makers, investors, the
public and students.

Policy makers
Through this paper, policy makers can have a better understanding of the variables influencing the
money supply and the significance of managing the money supply in the market in order to quickly
mitigate the negative consequences of an excess money supply. Policy makers can address this
issue by tightening monetary policy.

Public knowledge
This research can provide general knowledge to the public about the current economic situation in
Malaysia. Therefore, Malaysians can make early preparations for economic crises such as inflation
which leads to an increase in the price of goods as a result of excess money supply in Malaysia.

Investor
As investors, this research paper can give a clear understanding of Malaysia’s economy and
identify the best time to make investment. Investors can predict the path of the economy by
studying changes in the money supply. Rapid rise in the money supply, for example, could signal
economic expansion, impacting investment strategies.

Student
This research paper will be an important reference source for students conducting research in the
same field in the future. Examining historical data, trends, and economic theories is part of the
study of money supply. This develops research and analytical abilities that are useful in academic
and professional situations.

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1.7 LIMITATION OF THE STUDY

Lack of the data availability

The limitation of the study revolves around the availability and accuracy of data concerning money
supply. The data provided by central banks and statistical agencies, while essential, may not
consistently meet our requirements due to potential issues with timeliness and comprehensiveness.
Inaccurate or incomplete data can jeopardise the accuracy of research studies and results.

Economic influence
The influence of economic shocks, such as financial crises or pandemics, must be approached with
caution, as they can significantly disrupt the typical functioning of money supply dynamics. To
avoid misinterpretations of causality, researchers must account for these shocks when investigating
the relationship between money supply and economic indices.

Policy changes
Endogeneity presents a complex challenge as it implies a mutual relationship between money
supply and other economic variables, complicating the establishment of clear causal relationships
in study. For example, when central banks change interest rates or execute quantitative easing, the
amount of money accessible in the economy might change. When studying the relationship
between the money supply and economic variables, researchers must take these policy changes
into account.

8
1.8 OPERATIONAL DEFINITIONS
Money Supply: Money supply is defined to be the entire stock of currency and other liquid
instruments circulating in a country’s economy as of a particular time (Mohamed Imthinan, 2019).

Interest Rate: The cost of borrowing or the return on investment expressed as a percentage of the
principal amount.The interest rate is exogenously determined, as the interest rate is not determined
by the mechanisms of markets - supply and demand of savings and money; however, the interest
rate is determined exogenously by the central bank, according to other economic objectives
(Hassan & Teleb, 2022).

Gross Domestic Product (GDP): Gross domestic product or gross national product is generally
measured to know the economy’s growth situation (Gnawali, 2019).

Exchange Rate: Appreciation or depreciation of the domestic currency against foreign currencies,
may influence the investment or portfolio strategies of commercial banks (Mohamed Imthinan,
2019).

Reserve Ratio: The reserve ratio, or reserve requirement, is the proportion of a bank's deposits
that it must hold in reserve, set by the central bank. This requirement aims to ensure financial
stability and control the money supply (Mankiw, 2016).

Inflation Rate: Inflation rate refers to the percentage change in the general price level of goods
and services in an economy over a specified period, typically measured on an annual basis
(Mankiw, 2014).

9
1.9 CONCLUSION

In conclusion, this chapter provides an overview of the study's background, problem

statement, research questions, research objective, scope, significance, and data sources. The study
aims to investigate the factors that affect the money supply in Malaysia, with a focus on
independent variables such as interest rate, GDP, exchange rate, reserve ratio, and inflation rate.

10
 CHAPTER 2
LITERATURE REVIEW
2.1 INTRODUCTION
A literature review involves critically summarizing and appraising previously published materials,
including scholarly articles, books, theses, and relevant sources pertaining to a particular topic or
research question and objective. The past research referred to is from 2013 to 2023 to make sure
the information gathered is still relevant. By referring to the past study, it will give a picture of
what kind of result that will be derived on the research topic. Besides, another methodology can be
used and additional information that can be included in the current study as an improvement.

2.2 LITERATURE REVIEW (DEPENDENT VARIABLE)

In Nigeria, narrow money supply, often denoted as M1, comprises currency held outside banks,
demand deposits in commercial banks, and domestic deposits within the central bank, excluding
federal government deposits held in commercial banks. Meanwhile, M2 includes M1 plus
quasi-money, which comprises savings and time deposits with commercial banks. These
statements are derived from the research of “Determinants of Money Supply in Nigeria” which
was conducted by Augustine and Phillips (2018).
Besides, according to Maesaroh and Triani (2013) which undertook a study to assess the
factors influencing the money supply in Indonesia from 2006 to 2011 said that the narrow
definition of money, known as M1, refers to currency and demand deposits. Meanwhile, the
broader definition of money, termed M2, encompasses M1 plus time deposits and savings deposits.
An even broader definition of money is M3, which includes M2 plus bonds.
Furthermore, the study of ‘Determinants of Money Supply in Maldives’ carried out by
Mohamed Imthinan states that the money supply represents the total amount of currency and easily
convertible liquid assets circulating within an economy at a specific moment. Monetary aggregates
can take different forms, but typically, money supply is categorized as either narrow or broad.
Narrow money includes cash, circulating coins, and similar easily accessible monetary substitutes,
while broad money encompasses narrow money along with short-term and/or long-term deposits.

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2.3 LITERATURE REVIEW (INDEPENDENT VARIABLE)

RELATIONSHIP BETWEEN INTEREST RATE AND MONEY SUPPLY

Interest rate is the instrument that is controlled by the Central Bank according to the monetary
policy. It is generally defined as a general increase in the price level of a country in a certain period
whether monthly or yearly. A rise in the price level of a country would lower the economic growth.
This is because inflation raises the uncertainty concerning future investment profitability which
leads to a more conservative investment and results in lower levels of growth. In order to control
inflation and stimulate economic growth, interest rates will be reduced or expanded according to
the current economic performance. The borrower will be charged by the cost of borrowing by the
lender that is calculated based on the interest rate (Priscilla & Sook, 2021).
According to Agustine and Phillips (2018), who conducted the research on analysis of the
determinants of the money supply in Nigeria between 1981 to 2015 found that there is the
significant relationship between interest rate and money supply which is a bidirectional
relationship. This was proven through the Autoregressive Distributed Lag (ARDL) that revealed
the short run coefficients of the model and also the long run through the bound test. This means
that interest rate leads to changes in money supply and money supply also can affect the interest
rate in Nigeria. Hence, the changes of interest rate can affect the money supply and vice versa.
Meanwhile, the study by Adediyan (2020) which is also based in Nigeria that analyzes the
determinants of money supply evaluates on the same inquiry states that the interest rate has a
significant effect on money supply. This finding is derived based on the data that was utilized from
1980 to 2019 by using the (ARDL) approach. Based on the result, the long run impact of interest
rate is negative and statistically significant. It was due to the rising interest rate leading to a drop of
the fraction of money people hold. Hence, reduces economic activities and money supply.
However, the current rate of interest, in the short run, plays an insignificant positive role in the
money supply.
On the other hand, the scrutiny carried out which is “Determinants and stability of money
supply in Bangladesh” is done by Sheikh Abdul Kader et al. (2020). Interest rate is one of the
macroeconomic variables chosen to evaluate the relationship between this instrument and money

12
supply. Time series annual data which is from 1991 to 2020 is selected for analysis. Regression
analysis, and other econometrics stools will be used to direct the exact examination. Finding
acquired from the study finds that interest rate is positively and significantly linked to the money
in circulation. When the interest rate rises, it will be followed by the enhancement in money
supply.
In the research work conducted by Muhammad Lokman Hakimi (2021) on ‘Money supply and
economic activities in Malaysia’ using time series data from 2013 to 2018 by using ARDL. The
results obtained show that interest rates have a positive and significant effect on the money supply
in the short run.

RELATIONSHIP BETWEEN GROSS DOMESTIC PRODUCT (GDP) AND MONEY

SUPPLY
Solaiman and Mohammed (2022) has examined the relationship between money supply and
real GDP in Egypt. The data taken from 2004 – 2019 using the Johansen-Juselius test (1990) to
accomplish the objective. The findings showed that the real GDP has significant long-term effects
on money supply. Real GDP is calculated using base year prices that give an idea of ​the value of
the resulting goods and services. Real GDP is a benchmark for the economic condition of a
country.
In addition, Maesaroh and Triani (2013) who conducted a study to evaluate the determinants of
the money supply in Indonesia also found that gross domestic product GDP has a significant effect
on the money supply. Data for this study used time series data taken in the quarterly period from
first quarter of 2006 to fourth quarter 0f 2011 by using multiple linear regression. GDP is a
measure of the country's economy to summarize that people who have income have spent to buy
goods and services that are offered in the country. Money is one of the requirements to do a buying
and selling transaction.
According to Hussain and Haque (2017), there is an important impact in the relationship
between money supply and GDP. The findings of this study were obtained after conducting
research on the impact of relationship between money supply and per capita GDP growth rate in
Bangladesh using VECM model by taking data from 1972 - 2014. According to classical
economics, there is no relationship between money supply and GDP but Hussain and Haque have

13
found evidence through a study using the VECM model in Bangladesh which states that there is a
long relationship between money supply and GDP.
Osuji and Ekeagwu (2021) have also done a research paper about determinants of money
supply in Nigeria from 1981 to 2019 using Auto Regressive Distributed Lag (ARDL). This study
finds the relationship between gross domestic product (GDP) and money supply. The result is that
GDP has a positive and significant relationship with money supply in Nigeria. Similarly, based on
a study by Bard, Adam, and Mustafa (2020) which found that GDP has a positive impact towards
money supply.

RELATIONSHIP BETWEEN EXCHANGE RATE AND MONEY SUPPLY

An exchange rate is the rate at which one currency can be exchanged for another. Stated
differently, it symbolizes the worth of a certain currency relative to another. According to Ali,
Mahmood, Bashir (2015) stated that high money supply will raise the price level which leads to
increase in exchange rate volatility. The findings of this investigation were acquired following
study into the Impact of Interest Rate, Inflation and Money Supply on Exchange Rate Volatility in
Pakistan. This study was analyzed by applying Johansen Cointegration (trace test & eigenvalue)
Tests) and Vector Error Correction Model (VECM) in Pakistan ranging from July 2000 until June
2009. This result has a positive relationship between money supply and exchange rate in Pakistan.
Furthermore, according to Sheikh Abdul Kader et all., (2020) stated that the increase in money
supply is associated with depreciation of the exchange rate. The journal title is “Determinants and
stability of money supply in Bangladesh: An empirical investigation”. The objective is to use time
series data from Bangladesh's 1991 to 2020 to investigate the impact of exchange rates on the
overall money supply.
Subsequently, John Ahearne et al. (2014) state to examine how shocks to the economy spread
internationally, paying particular attention to how changes in the money supply affect exchange
rates. This journal title is ‘The effects of monetary policy on exchange rates’. The objective is to
ascertain if fluctuations in one nation's money supply may influence fluctuations in other nations'
exchange rates. They employ a panel data regression model that includes data on money supply,
exchange rates, and interest rates variables for a panel of 25 developed countries from 1980 to
2010. The authors conclude that a contractionary monetary policy shock causes the currency of a

14
nation to appreciate, whereas an expansionary monetary policy shock causes the currency of that
country to depreciate.
In addition, according to the Jeffrey and Nesphine (2022) is a comprehensive that provides a
thorough analysis of exchange rates, their determinants, and their impact on the global economy.
The objective is to examine the complex relationship between money supply and exchange rates,
highlighting the potential impact of monetary policy on exchange rate movements. Based on the
journal, the relationship between money supply and exchange rate is a positive relationship or
significant.

RELATIONSHIP BETWEEN RESERVE RATIO AND MONEY SUPPLY

The reserve ratio stands as a pivotal tool within the arsenal of monetary policy wielded by
central banks worldwide, enabling meticulous regulation of the money supply within their
respective economic domains. Defined by the esteemed Board of Governors of the Federal
Reserve System (2023), the reserve ratio delineates the proportion of deposits that banking
institutions are compelled to retain as reserves, constricting the pool of available funds for lending
purposes. A hike in this ratio corresponds to an enlargement of the money supply, potentially
restraining the tempo of economic growth. Conversely, a reduction in the reserve ratio has the
potential to catalyze economic dynamism by infusing a surge in the money supply.
According to Bawa et al. (2018), who examined the cash reserve ratio, money supply and the
profitability of deposit money banks in Nigeria between 1980 until 2018 by using (ARDL)
discovered that reserve ratio on money supply has a negative relationship in Nigeria. This shows
that if the reserve ratio is increasing it affects the money supply to decrease. Hence, the changes of
reserve ratio affect the money supply and vice versa.
Similarly, a study by Al-Jarrah, Zaidat, and El-Rimawi (2013) examined data from Jordan
between 2000 and 2010, demonstrating that increases in the reserve ratio led to declines in the
growth of the money supply. It also shows that the reserve ratio has an insignificant relationship on
money supply in Jordan.
A study made by Victor (2017) who published an article stated that the money multiplier and
the money supply are negatively related to reserve ratio. This proved that reserve ratio and money
supply has insignificant and negative relationships.

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RELATIONSHIP BETWEEN INFLATION RATE AND MONEY SUPPLY
The inflation rate is a crucial metric in monetary policy, widely employed by central banks
worldwide to regulate the economic environment. As outlined by authoritative sources such as the
U.S. Bureau of Labor Statistics (2023), the inflation rate represents the percentage change in the
general price level of goods and services over a specified period. Central banks carefully monitor
and target inflation rates to maintain price stability and economic growth. An increase in the
inflation rate can prompt central banks to implement contractionary measures to curb excessive
price increases, such as raising interest rates. Conversely, a decrease in the inflation rate may lead
to expansionary measures, such as lowering interest rates, to stimulate economic activity and
prevent deflationary pressures. The management of inflation rates is a dynamic aspect of monetary
policy, aiming to strike a balance that fosters sustainable economic development.
According to Alhaj, Abker and Mohammed (2020), the inflation rate has positive and
statistically insignificant effects on the money supply. This result is consistent with the World
Bank: World Development Indicators, which found a positive relationship between inflation and
money supply in Nigeria. The study utilizes the Auto-Regressive Distributed Lag (ARDL)
approach with an associated error correction method (ECM) on annual time series data spanning
from 1980 to 2016. The data sources include information obtained from the Central Bank of Sudan
and the Central Bureau of Statistics. The analytical procedures are conducted using the Eviews
package, specifically Version 10.
Furthermore, Dekkiche (2022) asserts a robust positive correlation between the money supply
and inflation rate in Egypt, emphasizing a significant short-term impact. This aligns seamlessly
with Fisher's quantitative theory of money (M.V = P.Y), positing that an upsurge in the money
supply invariably triggers an escalation in the inflation rate. Similarly, the empirical investigation
conducted by Ofori-Frimpon et al. (2017) illuminates a lasting affirmative nexus between money
supply and inflation rate in Ghana, employing Ordinary Least Squares. The scholarly team utilized
a sophisticated Vector Error Correction Model (VECM) regression technique to comprehensively
scrutinize the interrelationship between money supply and the inflation rate (INF) in Egypt,
spanning the extensive period from 1990 to 2019. The study rigorously employed a
Johansen-Juselius cointegration test alongside the implementation of the Vector Error Correction

16
Model to discern both enduring and immediate connections between these critical economic
variables.
Besides, a study Sola and Peter (2013) investigate the relationship between money supply and
inflation rate in the specific context of Nigeria. According to their findings, a positive relationship
exists between these two variables, suggesting that changes in the money supply significantly
impact inflation rates in the country. The finding because they used secondary data that ranged
between 1970-2008 were sourced from the CBN Statistical Bulletin and the study used Vector
Auto Regressive (VAR) model to find the relationship.

17
2.5 CONCLUSION
Generally, the literature review is very helpful for the future researchers in illustrating the
development of concepts, theories, and methods, aiding upcoming researchers in understanding
how a field has evolved and allowing them to potentially expand on previous contributions. The
reader may be inspired to use another method, variable, data which may derive better findings.
Besides, it gives a picture of the relationship between chosen independent variables to other
variables in the new study.

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 CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
Research methodology is the structured and systematic approach employed by researchers to
collect data, analyze information, and derive expectations based on the past studies, serving as the
framework or strategy to address research inquiries or resolve issues. This part also consists of data
resources and indicators for analyzing.

3.2 MODEL
Influence of factors that could affect the other variable which is money supply is helpful in
designing the model. The factors influencing it are considered as the independent variables which
are interest rate, GDP, exchange rate, reserve ratio and inflation rate based on this research. Money
supply will act as a dependent variable because it is influenced by the independent variables. The
function can be formulated as below:
FUNCTION:
MS = f (IR, GDP, EXCH, RR, INF)
Once the formulation is established, an equation will be devised to analyze the model's estimation.
The equation for estimation can be structured as follows. This estimation function indicates that
money supply functions as the dependent variable, while interest rate, gross domestic product,
exchange rate, reserve ratio and inflation rate serve as the independent variables.

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EQUATION:

MS = 𝑎 + ꞵ1IR + ꞵ2GDP + ꞵ3 EXCH + ꞵ4RR + ꞵ5INF + ε

Where:
𝑎 = Constant
Ꞵ 1,2,3,4,5 = Coefficient of the independent variables
ε = Error term
Dependent variable:
MS = Money supply
Independent variable:
IR = Interest rate
GDP = Gross Domestic Product
EXCH = Exchange rate
RR = Reserve ratio
INF = Inflation Rate
3.3 CONCEPTUAL FRAMEWORK

Figure 3.4: Conceptual Framework

20
3.4 EXPECTED SIGNS
Table 3.4: Expected sign for independent variables

INDEPENDENT EXPECTED SIGN AUTHOR (YEAR)

VARIABLE

Interest rate Positive Augustine & Phillips (2018)

Sheikh Abd Khader et.al (2020)
Muhammad Lokman Hakimi (2021)

GDP Positive Solaiman and Mohammed (2022)

Osuji and Ekeagwu (2021)
Bard, Adam and Mustafa (2020)

Exchange rate Positive Bordo & Golden (2015)

Ahearne et.al (2014)
Farhi & Summers (2015)

Reserve ratio Negative Aderopo R. Adediyan (2020)

Bawa et al. (2018)
Lone and Yadav (2016)

Inflation Rate Positive Alhaj, Abker, and Mohammed (2020)

Dekkiche (2022)
Sola and Peter (2013)

21
3.5 RESEARCH HYPOTHESIS
Interest Rate
H0: There is an insignificant relationship between interest rate and money supply in Malaysia.
H1: There is a significant relationship between interest rate and money supply in Malaysia.
Gross Domestic Product (GDP)
H0: There is an insignificant relationship between GDP and money supply in Malaysia.
H1: There is a significant relationship between GDP and money supply in Malaysia.
Exchange Rate
H0: There is an insignificant relationship between exchange rate and money supply in Malaysia.
H1: There is a significant relationship between exchange rate and money supply in Malaysia.
Reserve Ratio
H0: There is an insignificant relationship between reserve ratio and money supply in Malaysia.
H1: There is a significant relationship between reserve ratio and money supply in Malaysia.
Inflation Rate
H0: There is an insignificant relationship between inflation rate and money supply in Malaysia.
H1: There is a significant relationship between inflation rate and money supply in Malaysia.

22
3.6 VARIABLE DESCRIPTIONS
Dependent Variable:
● Money supply
The money supply refers to the overall sum of money in circulation, encompassing cash,
coins, and balances in bank accounts. It is often characterized as a collection of secure
assets accessible to households and businesses for making payments or holding as
short-term investments. This includes U.S. currency, as well as balances in checking and
savings accounts, which are incorporated into various measures of the money supply.

Independent Variables:
● Interest rate
The interest rate is the extra amount levied by a lender on top of the principal amount
borrowed from the borrower. On the recipient's side, an individual depositing money in a
bank or financial institution also earns additional income, acknowledging the time value of
money. This additional income received by the depositor is commonly referred to as
interest.

● Gross Domestic Product (GDP)

It serves as the conventional gauge of the value added generated through the production of
goods and services within a country over a specific period. Consequently, it quantifies the
income derived from this production or the overall expenditure on final goods and services
(excluding imports).

● Exchange rate
An exchange rate represents the ratio at which one currency can be traded for another
across nations or economic zones. This metric is pivotal in establishing the relative worth
of diverse currencies in comparison to each other and plays a crucial role in shaping the
dynamics of trade and capital flows. The exchange rate serves as a fundamental factor
influencing international commerce, investment decisions, and overall economic
interactions between different regions.

23
● Reserve ratio
The reserve ratio denotes the mandated minimum percentage of funds set by the central
bank that each commercial bank is obligated to set aside. This requirement is a regulatory
measure that every bank must comply with, with the central authority retaining the
authority to adjust this ratio based on economic needs. In essence, commercial banks are
obliged to reserve a specific portion of their deposits to ensure financial stability and
control the money supply within the economy. The central bank can exercise its discretion
to raise or lower this ratio in response to prevailing economic conditions, thereby
influencing the liquidity and lending capacity of the banking system. This mechanism
provides a tool for monetary authorities to manage economic stability and regulate the
overall financial environment.

● Inflation rate
Inflation is the percentage increase in prices observed over a specified duration. This metric
is generally applied broadly, encompassing overall price escalation or the upsurge in the
cost of living within a country. However, it can also be computed more narrowly, focusing
on specific goods like food or services such as hairstyling. Irrespective of the scope,
inflation quantifies the extent to which the targeted set of goods and/or services has
experienced an augmentation in cost over a designated period, commonly measured on an
annual basis.

24
3.7 DATA COLLECTION METHOD
Data collection is the process of gathering and studying all of the information that is obtained from
primary and secondary data. In this study, journal data is the main source that is used to do the
research and strongly support the data from World Development Indicators. The information
provided helps to obtain the data and statistics regarding the dependent variable which is money
supply and for the independent variables which are interest rate, gross domestic product, exchange
rate, reserve ratio and inflation rate. The observations for this study are 54 years from 1969 to
2022.
● World Development Indicators
World Development Indicators are websites that are established by the World Bank. These
indicators are officially recognized as international sources. This website helps researchers to find
any type of indicators. This website also provides the data regarding data coverage, curation and
methodologies.
● Bank Negara Malaysia
Bank Negara Malaysia’s website is referred to allocate the data which is used as support to this
research. The researchers are able to find a variety of data such as interest rate and level of money
supply.

3.8 MEASUREMENT FOR ANALYSIS

● Descriptive Statistics
In data analysis, descriptive statistics comprise a collection of numeric metrics that effectively
encapsulate the fundamental attributes of a given dataset. These measures comprise indicators of
central tendency such as the mean, median, and mode, which offer understanding of the typical or
central value of the dataset. Dispersion measures, including range, variance, and standard
deviation, serve to illustrate the extent of dispersion or variability exhibited by the data points.
Furthermore, descriptive statistics include characteristics such as skewness and kurtosis, which
provide valuable information regarding the asymmetry and shape of the distribution. Percentiles,
including quartiles, serve to visualize the frequency distribution of values, whereas tools such as
histograms aid in comprehending the positional values of the dataset. In order to comprehend the
fundamental characteristics of data, statistical summaries are crucial for researchers, analysts, and

25
decision-makers. They facilitate well-informed interpretations and comparisons.

● Pearson Correlation
A statistical measure, the Pearson correlation coefficient (r), is frequently used to quantify the
direction and intensity of a linear relationship between two continuous variables. The value of this
parameter falls within the range of -1 to +1, with +1 signifying an ideal positive linear correlation,
-1 an ideal negative linear correlation, and 0 the absence of any linear correlation. By dividing the
covariance of the two variables by the product of their standard deviations, one can determine the
coefficient. A positive correlation indicates that there is a tendency for both variables to increase as
one variable rises, whereas a negative correlation implies that there is a tendency for both variables
to decrease as one variable rises. The Pearson correlation, which offers valuable insights into
patterns and relationships within datasets, is a commonly employed statistical measure in research
and data analysis for examining associations between variables. It is essential to note, however,
that correlation does not imply causation; additional variables may have an effect on the observed
relationships.

● T-statistic
When conducting hypothesis testing, the t-statistic assumes particular significance when applied to
sample data. This metric evaluates the significance of the difference between the means of two
distinct groups, offering an indication of the extent to which the sample mean differs from the
population mean expressed in standard error units. The t-statistic, which is computed by dividing
the discrepancy between the observed and predicted population means by the standard error of the
sample mean, is subsequently assessed against critical values derived from the t-distribution in
order to ascertain statistical significance. A greater absolute t-statistic signifies a more substantial
disparity between the means of the sample and the population, thereby providing more robust
evidence in opposition to the null hypothesis. The application of the t-statistic by researchers to
infer population parameters from sample data strengthens the reliability of inferential statistical
analyses across a variety of disciplines.

26
● R-Square
The coefficient of determination, commonly denoted as R-squared (R²), is a statistical metric
utilized to evaluate the extent to which the independent variables in a regression model account for
the variability observed in the dependent variable. R-squared values span a range of 0 to 1, where a
value of 1 signifies a perfect fit in which the model accounts for all the variability and 0 indicates
that the model fails to explain any variability. R-squared serves as a metric for quantifying the
degree of fit exhibited by a regression model. A high R-squared value does not, nevertheless,
indicate that the model is optimally fitted or that one or more independent variables are causally
related to the dependent variable. It is imperative for researchers to take into account additional
diagnostic indicators and contextual factors in order to formulate well-informed assessments
regarding the suitability and explanatory capability of the model.

● F- statistic
The F-test, a statistical procedure, is frequently utilized within the domain of regression analysis to
assess the validity and generalizability of a model. The F-test is a statistical test that determines
whether the variance in the dependent variable can be substantially explained by the addition of at
least one independent variable to the regression model. The test evaluates the degree of fit between
a restricted model, which excludes the independent variables, and the comprehensive model with
those variables. To determine the F-statistic, divide the variance accounted for by the model in
relation to the independent variable or variables by the variance that remains unexplained. When
the F-statistic is significantly large, it indicates that the inclusion of one or more independent
variables is substantial in account for the variance of the dependent variable. A predetermined
significance level, referred to as alpha, is commonly established by researchers in order to
ascertain the statistical significance of the F-statistic. If so, there is sufficient evidence to reject the
null hypothesis that the independent variables lack explanatory power when considered
collectively.

27
3.9 CONCLUSION
In summary, the research methodology employed a structured and systematic approach to
address research inquiries and resolve issues related to the determinants of money supply in
Malaysia. This approach provided a framework for collecting data, analyzing information, and
deriving expectations based on past studies. The data analysis methodology used EViews software
Version 10, which included descriptive statistics, Pearson correlation, and regression analysis.
These statistical tools provided a strong foundation for analyzing the correlations between the
variables and drawing relevant findings.

28
 CHAPTER 4
FINDINGS AND ANALYSIS
4.1 INTRODUCTION
This part consists of results that are derived from the data used from 1969 to 2022 which consist of
54 observations and analysis of the result by each method. By using the EView software Version
10, multiple regression was used which derived descriptive statistics, Pearson correlation, and
Regression. T-statistic, F-statistic and R-squared will be reviewed under Regression.

4.2 DESCRIPTIVE STATISTICS

Table 4.1: Descriptive Statistics
MS IR GDP EXCH RR INF
Mean 582.1241 4.8502 6.0223 3.1056 3.7802 3.9594
Median 281.0000 4.7250 6.1950 3.0550 3.4050 3.7300
Maximum 2134.800 9.7500 11.7000 4.4000 7.8000 17.8700
Minimum 4.3000 1.5600 -7.3600 2.1800 2.1900 -8.7200
Std. Dev. 663.2332 2.2113 3.8057 0.6745 1.2182 4.6821
Skewness 0.9992 0.6229 -1.4591 0.3638 1.0968 0.2215
Kurtosis 2.6034 2.3603 5.6765 1.7073 4.0202 4.0433

Observations 54 54 54 54 54 54

Table 4.1 is the descriptive statistical result derived by all variables. Data of all variables
obtained from the World Development Indicator from 1969 to 2022 which consists of 54
observations. Based on the table, money supply which acts as a dependent variable recorded the
highest mean and standard deviation over all independent variables where it was recorded at
582.1241 and 663.2332 respectively. Meanwhile, GDP mean value is the largest among all the
independent variables and followed by interest rate. Both mean values are 6.023 and 4.850185
respectively. Standard deviation recorded by GDP is 3.8057 and 2.2113 by interest rate. Lowest
mean and standard deviation is 3.1056 and 0.6745 were obtained by exchange rate. In addition, the

29
reserve ratio mean value is 3.7802 whereas standard deviation is 1.2182. Inflation rate mean value
is 3.9594 and recorded the highest standard deviation compared to other independent variables. It
is proven when it reaches 4.6821.
Money supply also obtained the highest median at 281 and followed by GDP, interest rate,
inflation rate, reserve ratio and exchange rate. These median values are 6.1950, 4.7250, 3.37,
3.405, 3.0550 respectively. Meanwhile, the inflation rate’s minimum is lowest at -8.72 meanwhile
GDP is second lowest at -7.36. Minimum value of money supply, interest rate, exchange rate and
reserve ratio are 4.3, 1.56, 2.18 and 2.19 respectively. Besides, the highest maximum value is
2134.8 which is derived by money supply, while the lowest maximum value obtained by exchange
rate is recorded at 4.4. Interest rate, GDP, reserve ratio and inflation rate maximum value are 9.75,
11.75, 7.8 and 17.87 respectively.
From the skewness aspect, the reserve ratio is only the variable that is skewed to the right
side due to a positive value at 1.0968. Reserve ratio skewed to the right side that is furthest from
the x-axis due to highest skewness value. However, GDP is only the variable that recorded the
skewness negative value which is -.1.4591 that leads to skew to the left side. Meanwhile, skewness
values which are 0.6229 and 0.3638 and 0.2215 are considered as the normal distribution which is
derived by the interest rate, exchange rate and inflation rate because of the value around 0.
The kurtosis value that is inferred in the table will determine the data distribution of each
variable whether normal or not normal. The data distribution of independent variables such interest
rate, exchange rate, and inflation rate are normal. The kurtosis value indicates preferable normal
when its value is around 1 to 3. As a result, the kurtosis value of interest rate, exchange rate, and
inflation rate are recorded at 2.3603, 1.7073, 1.0433 respectively. However, data distribution of
GDP and reserve ratio are still considered normal because they are lower than 10. Based on the
kurtosis value derived by the independent variables, the distribution data of interest rate, exchange
rate and inflation rate will be flattened due to its value below 3 meanwhile when the value above 3,
the distribution data is peaked. Hence, GDP and reserve ratio have peaked.

30
4.2 PEARSON CORRELATION
The analysis indicates various correlations among economic variables. Money supply exhibits
a negative correlation with the interest rate (-0.692), gross domestic product (-0.3311), reserve
ratio (-0.0024), and inflation rate (-0.1776). However, only the exchange rate (0.7884) is positively
correlated towards money supply. The interest rate shows positive correlations with gross domestic
profit (0.19005), exchange rate (-0.691533), reserve ratio (0.344579), and inflation rate
(0.006935). Gross domestic profit is positively correlated with exchange rate (-0.4169), reserve
ratio (-0.1621), and inflation rate (0.4379). Meanwhile, the exchange rate has a negative
correlation with the reserve ratio (-0.1619) and inflation rate (-0.1789). Additionally, the reserve
ratio exhibits a negative correlation with the inflation rate (-0.2320). It's important to review these
correlations for accuracy and consistency, ensuring that the signs and magnitudes align with the
expected relationships between the variables. Generally, there was no evidence of multicollinearity
among the independent variables. There were no correlations greater than 0.8 between money
supply and the independent variables.
4.3 REGRESSION ANALYSIS
Table 4.3 Regression Analysis

Variable Coefficient Std. Error t-Statistic Prob

C -936.3436 574.5495 -1.629701 0.1097

IR -115.4561 35.06506 -3.292626 0.0019

GDP -2.331968 16.92717 -0.137765 0.8910

EXCH 537.6822 120.6986 4.454751 0.0001

RR 115.1162 47.29387 2.434061 0.0187

INF -3.148407 12.56727 -0.250524 0.8033

R-squared 0.705341
F-statistic 22.98004
Observations 54

31
 4.3.1 MODEL
By using regression analysis, the relationship between macroeconomic variables towards
predictor variables. It assists in modeling and examining the association between variables,
demonstrating how alterations in one variable could impact another. The result procured will
determine whether it is a positive or negative relationship between one variable to another variable.

MS = - 936.3436C - 115.4561IR*** - 2.3320GDP + 537.6822EXCH*** + 115.1162RR** -

3.1484INF

Based on the equation above, if all the variables are constant, the money supply will reduce by
RM 936.3436 billion. According to the coefficient above, interest rate and money supply have a
negative relationship. Therefore, if the coefficient, which stands for -115.4561, shows that a one
percent increase in interest rates is correlated with an RM 115.4561 billion drop in the money
supply. The negative sign suggests an inverse relationship, indicating that higher interest rates are
associated with lower levels of Money Supply. In addition, the gross domestic profit coefficient is
-2.332. This suggests that the money supply should fall by RM 2.332 billion for every 1% growth
in GDP. A negative coefficient denotes a negative relationship, meaning that the Money Supply
tends to decline as GDP increases. However, the coefficient of exchange rate has a positive
relationship with money supply. It shows the coefficient of exchange rate is 537.6822. This
indicates that the money supply is predicted to rise by RM 537.6822 billion for every 1% increase
in the exchange rate. The positive symbol denotes a direct relationship, meaning that greater levels
of money supply are linked to stronger exchange rates.
Besides, Reserve Ratio also has a positive relationship with money supply with the coefficient
is 115.1162. According to this, the money supply is predicted to grow by RM 115.1162 billion for
every 1% rise in the reserve ratio. Increased reserve ratios and greater money supply levels may be
related, as seen by the positive coefficient, which shows a positive association.
The inflation rate is assigned a coefficient of -3.1484; the implications of this coefficient
provide light on the dynamic link between the money supply and inflation. In real terms, the
Money Supply is expected to decrease by RM 3.1484 billion for every 1% increase in the rate of

32
inflation. The inverse association revealed by the coefficient's negative sign indicates that the
money supply tends to become less available as inflation rates rise. Basically, this illustrates a
financial situation in which increased inflationary pressures align with a reduction in the money
supply, illustrating the complex relationship between these economic factors.
Overall, it can be concluded that interest rates, GDP and inflation rate have a negative
relationship with the money supply meanwhile reserve ratio and exchange rate are positively
linked towards money supply. Based on the equation above, the most significant variables are
interest rate and exchange rate where the probability values are at 0.0019 and 0.001 respectively.
Meanwhile, the reserve ratio is considered intermediate significance due to its probability value
below 0.05 where it is recorded at 0.0187. Last but not least, GDP and inflation rate are not
significant because of its probability value higher than 0.1. The probability values of both variables
are 0.8910 and 0.8033 respectively.

4.4 COEFFICIENT OF DETERMINATION (R-squared)

R-squared is a statistical measure that represents the proportion of the variance in the
dependent variable that is explained by the independent variables in a regression model. The
results show R-squared is 0.7053. This indicates that 70.53% of the variation in the dependent
variable which money supply can be explained by all independent variables (interest rate, gross
domestic product, exchange rate, reserve ratio and inflation rate), whereas only 29.47% remains
unexplained by the model. These might be other independent variables that influence changes in
the dependent variable.

4.5 T-STATISTIC
The dependent variable and independent variable are compared using the T-statistic to see
whether the dependent variable and independent variable are significant correlations or not. A
statistically significant negative association exists between money supply and interest rate (IR), as
evidenced by a T-statistic of -3.2926 and a p-value of 0.0019. Conversely, the relationship between
money supply and gross domestic product (GDP) appears less clear-cut. The analysis found no
statistically significant correlation, as reflected by a T-statistic of -0.1378 and a p-value of 0.891.

33
 On the other hand, a statistically significant positive relationship was observed between money
supply and exchange rate (EXCH), with a T-statistic of 4.4548 and a p-value of 0.0001. Similarly,
a statistically significant positive association was found between money supply and reserve ratio
(RR), as evidenced by a T-statistic of 2.4341 and a p-value of 0.0187. Other than that, there is no
statistically significant correlation found between money supply and inflation (INF), as indicated
by a T-statistic of -0.2505 and a p-value of 0.8033.

4.6 F-STATISTIC
F-statistic is used to test the overall significance of the regression model. The rule of thumb for
F-statistics needs to be more than 4. From this study, F-statistic is 22.9800, higher than 4. It
indicates that all independent variables have a significant impact on the dependent variable.

4.7 INTERPRETATION OF RESULT

An engaging story has been revealed in the economic symphony by means of the thorough
examination of macroeconomic indicators covering the years 1969 to 2022, which was made
possible by the utilization of several statistical approaches and EViews software. The distribution,
dispersion, and central tendency of the variables were vividly depicted by the descriptive statistics.
The complex interactions between the variables were further examined by regression and Pearson
correlation studies, which identified Money Supply as a key variable with a notable mean and
standard deviation.
The results of the regression model revealed a significant negative connection, highlighting the
crucial influence of interest rates on the dynamics of the money supply. Still, the relationship
between GDP and Money Supply seemed complex, and more research into their complex
interactions is warranted given their statistical insignificance. Furthermore, the favourable
correlations between Exchange Rate and Money Supply shed light on the significant functions that
the Reserve Ratio and Money Supply play. These revelations give policymakers and economists a
road map for negotiating the intricate web of economic factors and are a great resource for
developing ways to preserve financial stability and liquidity in the face of a changing economic
environment.

34
 When analysing the findings, it is important to keep in mind that the results defy previous
research's expectations due to the negative relationship between interest rates and money supply. In
the past, research conducted in Malaysia by Muhammad Lokman Hakimi (2021), Sheikh Abd
Khader et al. (2020), and Agustine and Phillips (2018) suggested a positive correlation between
these characteristics. The higher cost of borrowing when interest rates rise, however, can be used
to explain the observed negative correlation based on the result obtained. This could discourage
investment and spending and ultimately reduce the amount of money in circulation. The
probability value of interest rate is 0.0019, which indicates that this variable is significantly linked
to money supply in Malaysia.
In Malaysia, GDP deviated from expectations by showing a statistically insignificant negative
association with money supply, as opposed to positive correlations found by Solaiman and
Mohammed (2022), Osuji and Ekeagwu (2021), and Bard, Adam, and Mustafa (2020). This
discrepancy can be linked to transient swings and the effect of sharp increases in the money supply
on inflation, which impedes the expansion of real GDP.
The positive relationship between money supply and exchange rate, is consistent with studies
conducted by Bordo and Golden (2015), Ahearne et al. (2014), and Farhi and Summers (2015).
Foreign direct investment is drawn to stable currencies, which encourages banks to increase their
money supply for lending. Exchange rate also has the highest significant level among other
independent variables with money supply in Malaysia where its probability value is 0.0001.
Surprisingly, the considerable positive association between reserve ratio and money supply
contradicts proven negative relationships observed in research by Aderopo (2020), Bawa et al.
(2018), and Lone and Yadav (2016). This can be the result of particular contextual elements inside
the Malaysian economy. Besides, its findings that this variable has a significant effect towards
money supply in Malaysia.
Furthermore, studies by Alhaj, Abker, and Mohammed (2020), Dekkiche (2022), and Sola and
Peter (2013) all revealed positive relationships between the money supply and inflation rate, which
contrasts with the observed negative insignificance between the two in Malaysia (2013). This
inverse association points to a special dynamic that exists in Malaysia.
Lastly, according to the result of regression analysis there are 3 independent variables that are
accepted which are interest rate, exchange rate and reserve ratio. Meanwhile, there are 2

35
independent variables that are rejected which are gross domestic product and inflation rate. The
regression data examined shows a positive and negative association according to the t-statistic and
probability. For the hypothesis that is stated, we can summarize that the hypothesis for interest
rate, exchange rate and reserve ratio are accepted for the H1 hypothesis. Moreover, for the gross
domestic product and inflation rate the hypothesis for the independent variables are rejected for the
H1 hypothesis and accepted for the H0 hypothesis.

4.8 CONCLUSION
In conclusion, a rich tale of the economic symphony has been revealed by the thorough
examination of macroeconomic indicators from 1969 to 2022 using EViews software and a variety
of statistical techniques. A thorough picture of the variables' distribution, dispersion, and central
tendencies was given by the descriptive statistics. Regression and Pearson correlation analyses
were used to further examine the relationships between the variables, and Money Supply stood up
as a significant actor with the largest mean and standard deviation.
The regression model demonstrated a significant negative correlation, highlighting the interest
rate's important role in influencing the dynamics of the money supply. The relationship between
GDP and Money Supply, on the other hand, seemed more complex, and statistical insignificance
suggested that further research was necessary to fully comprehend how they interacted.
Additionally, the significant roles that the Reserve Ratio and Money Supply have in the economic
story were highlighted by the positive connections between them and the Exchange Rate and
Money Supply. The research offers insights that can guide methods for preserving financial
stability and liquidity in the constantly changing economic landscape, giving policymakers and
economists a road map for navigating the intricate symphony of economic variables.

36
37
 CHAPTER 5
CONCLUSION
5.1 INTRODUCTION
This chapter gives the study's conclusion and recommendations on the factors influencing
Malaysia's money supply. The previous chapters examined the study's background, problem
statement, research questions, research purpose, literature review, research methodology, findings
and analysis, and study limitations. This chapter is intended to provide a summary of the full study,
including an overview of the research, limitations, policy implications, and recommendations.

5.2 OVERVIEW
The dramatic increase in Malaysia's broad money supply has raised considerable concerns. The
research aims to investigate the determinants of money supply in Malaysia. The objective is to
identify and analyze the most influencing factor to the money supply in the country. The
hypothesis likely revolves around the relationship between various independent variables such as
interest rate, gross domestic product, exchange rate, reserve ratio, and inflation rate, and their
impact on the dependent variable, money supply.
To achieve both objectives, a time series data was used by choosing a few variables which
potentially influence the money supply which are interest rate, GDP, exchange rate, reserve ratio
and inflation rate where all the data consist of 54 observations. The numerical data allocated from
Bank Negara Malaysia and World Development Indicator starting from 1969 to 2022. For
analyzing, Eview Version 10 used to run the multiple regression which obtained descriptive
statistics, Pearson correlation, coefficient T-statistic, F-statistic and Durbin Watson as the analysis
measurement. All the measurement analyses are helpful to identify the significance of independent
variables toward dependent variable money supply.

38
5.3 REVIEW
Based on the results and analysis in Chapter 4, it showed that this study has answered
the objectives. The first objective is to investigate the factors that are influencing the
money supply in Malaysia. The multiple regression results from this study indicated interest rate,
exchange rate and reserve ratio have a significant effect on money supply, while GDP and
inflation rate have insignificant effect on money supply. Next, exchange rate and reserve ratio
have positive relationships with money supply while interest rates, GDP and inflation rate have
negative relationships with the money supply.
The second objective is to determine the most influencing factor toward money supply in
Malaysia. Based on the result, the most significant variable is the exchange rate. In fact, GDP and
inflation rate does not have any effect on the money supply in Malaysia. Based on the result
derived, the objective of this study was achieved when it was found that there are three variables
out of five that are significant towards money supply in Malaysia. The most significant factor is
exchange rate and followed by interest rate and reserve ratio.

5.4 POLICY IMPLICATION

The complex of economic indicators from 1969 to 2022 should cause policymakers to proceed
with caution when adjusting interest rates. The money supply and interest rates have a strong
negative correlation, revealing a complex relationship that requires careful analysis. Policymakers
can address excess money supply by tightening monetary policy. This could include enacting
measures to decrease the availability of money in the economy. Raising interest rates can have a
subtle effect on economic dynamics by casting a shadow over the money supply. Before adjusting
interest rates, policymakers should carefully consider the larger economic environment.
On the other hand, the connection between GDP and the money supply seems to be a more
complex relationship. The lack of statistical significance casts doubt on the accuracy of GDP as the
only indicator of changes in the money supply. To gain a more advanced picture of these
characteristics, policymakers might need to investigate other metrics.
Positive relationships among reserve ratios, money supply, and exchange rates produce a
harmonious ensemble in the economic symphony. To promote economic stability, policymakers
should think about strategically utilizing these relationships. Effective control of reserve ratios and

39
exchange rates may be able to create an economic connection that facilitates an expansion of the
money supply. For instance, policymakers can change the reserve ratio, which is the percentage of
deposits that banks must keep in reserve. If they raise the reserve requirement, banks will have less
money to lend, lowering the money supply. Besides, the government may consider pursuing an
exchange rate. This commitment imposes external discipline on monetary policy. If investors lose
confidence in the country's capacity to keep the fixed rate, they may sell the currency, reducing
foreign exchange reserves. To maintain the fixed rate, the central bank may need to tighten
monetary policy, therefore reducing the money supply.
However, given the modest role that the inflation rate plays in affecting the money supply, it is
possible that policymakers will discover more potent levers elsewhere. Changes in interest rates
and exchange rates are major players in the orchestration of changes in the money supply, but
inflation may only be a minor note in the overall economy.
***explain point tu bagi jelas , bagi contoh ke. Sebab mostly semua x paham maksudnya

5.5 LIMITATION
Availability of The Data
The exclusive dependence on two sources, specifically the World Development Indicators website
and Bank Negara Malaysia website, poses a potential constraint concerning the precision and
reliability of the data utilized in this study. The limitation arises from the inherent possibility that
divergent data may be presented by alternative sources for the same variables under consideration.
This potential variability in data across different sources introduces an element of uncertainty and
imprecision, as it suggests that the results obtained from this study might be influenced by the
specific characteristics and methodologies associated with the chosen data repository.
Consequently, the study's findings may not fully capture the comprehensive and nuanced nature of
the variables, thereby impacting the overall accuracy and reliability of the research outcomes.

Limitiation of The Variables

This study examines the relationship between economic growth and four chosen independent
variables: Interest rate, Gross Domestic Product (GDP), Exchange rate, and Reserve ratio. The
inclusion of these variables is vital for a holistic understanding of the factors influencing economic

40
growth, encompassing aspects such as the cost of borrowing, overall economic performance,
international trade dynamics, and monetary policy. It is crucial to note that extraneous dummy
factors, which are not explicitly part of the identified independent variables, may introduce
variability and potentially impact the study's findings. Recognizing and accounting for these
external factors is essential for a nuanced interpretation of the relationship between the selected
variables and economic growth.

Lack of Journal
In order to write this research report, a thorough examination of relevant literature is essential for
identifying suitable independent variables for our dependent variable. However, the scarcity of
journals focusing on our specific research area, especially concerning the relationship between
inflation rates and money supply, poses a challenge. Many existing journals primarily explore the
reverse relationship, making it more challenging to find relevant insights. To address this gap, we
need to employ diligent search strategies and broaden our scope of inquiry. Despite the existing
emphasis on the inverse relationship, our study aims to provide valuable insights into the
connection between inflation rates and money supply, contributing to the current understanding in
this field.

5.6 RECOMMENDATION
In light of the study's findings and limitations, several recommendations are proposed for
future research endeavors. Initially, improving data accessibility and timeliness is vital, and
researchers and data-providing organizations should work together to achieve this goal. Ensuring
the precision and dependability of analysis in future research depends heavily on this
advancement.
Furthermore, more study should be done on the analysis of economic unexpected events,
paying close attention to how things like pandemics and financial crises affect the complex
relationship between the money supply and economic variables. Understanding the relationship
between causes and the dynamic character of the money supply requires ongoing observation of
policy changes, especially those enacted by governments or central banks.

41
 In order to promote a more thorough knowledge of the complex processes impacting money
supply, researchers are encouraged as well to investigate variables other than those included in this
study. These suggestions are intended to direct future study in order to better understand the
intricacies of monetary dynamics and provide insightful information to both researchers and
policymakers.
*** suggest buat panel data in future . contoh investigate di negara southeast asia yg lain such
as thailand, indo . kenapa pilih negara tu and apa yg diperoleh bila pilih negara tu - ni memang dr
cakap dlm kelas haritu, jadi kene ade

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 APPENDICES
LITERATURE REVIEW MATRIX

NO TITLE AUTHOR OBJECTIVE INDEPENDENT METHODOLOG FINDINGS NOTES

AND YEAR VARIABLE Y

1 Determinant of Naveed To assess in detai Currency-Deposit Ratio,

Money Supply in Ahmad Lone the major Time Deposit-Deman
India and Dr. D.K determinants o Deposit Ratio,
Yadav (2016) money supply and Reserve/Deposit Ratio,
how the nature of
determinants has
changed over the
period of time

2 The Bard, Adam To examine the GDP growth, Exchange Time series data
Determinants of and Mustafa determinants of the rate, Domestic from 1980 to 2016
Money Supply in (2020) real money supply investment, Inflation
Sudan rate in Sudan by rate, exports, cost of
using time series finance, foreign direc
data covering the investment and
period (1980-2016) government spending

46
3 Money Supply Saraswoti To examine the Net Foreign Assets Regression
Determinants in Acharya determining factors (NFA), Net Domestic
Nepal Tiwari (2016) of money supply in Assets (NDA), Reserve
Nepal. to Total Deposits Ratio
(r), Time Deposits to
Demand Deposits ratio
(t) Currency to Demand
Deposits ratio (c)

4 Money supply Emmanuel Investigate the Exchange Rate, Time series data
budget defici Duodu et al money supply in Inflation Rate, from data
and inflation in (2022) Ghana Price level of goods and
Ghana services and Nomina
Interest Rate

5 Determinants and Sheikh Abdu To examine the GDP, Rate of Inflation Time series data
stability o Kader et al determining money Interest rate and from 1991 to 2020
money supply in (2020) supply for Exchange Rate
Bangladesh Bangladesh Regression analysis

47
 Econometrical tools

6 Determinants of Mohamed To investigate the Exchange rate, GDP Times series data
money supply in Imthinan main determinants growth and foreign from 2010 to 2018
Maldives Saudulla of money supply in liabilities growth.
(2019) Maldives.

7 Determinants of Adediyan To examine Reserve ratio, high ARDL Reserve ratio

money supply in (2020) important factor in powered money, liquidity Data 1980 - 2019 high powered

Nigeria determining money ratio, currency deposi money,

supply in Nigeria ratio, interest rate liquidity ratio
currency
deposit ratio
interest rate
have
significant
effects to
money supply

8 Money supply Solaiman S.H. To examine the RGDP, budget deficit Johansen-Juselius RGDP, budge
behavior in Egyp Mohammed long-run exchange rate, discoun test (1990) deficit,
A.T. (2022) determinants o rate, net domestic assets Data 2004 - 2019 discount rate,
money supply in net foreign assets net foreign

48
 Egypt assets have
significant
long term
effects on
money supply
whereas
exchange rate
and ne
domestic
assets have no
effects.

9. A Review o Dr. S.L Lodha To examine the high-powered money, the

Empirical Studies (2013) literature on money deposit reserve ratio, and
on Money Supply supply studies a the deposit to currency
at Abroad and in length at abroad and ratio
India in India

10 Money supply Serdar Ongan To investigates the The nonlinear Indicate

determination Ismet Gocer money supply autoregressive money supply
process of japan (2019) determination distributed lag determination
process for japan (ARDL) model process with

49
 an unstable
money
multiplier

11 The nature of Atif Batarseh To investigates Consumer price index Augmented

relationship (2021) realtionship between Dickey-Fuller
between money money supply and (ADF) test
Supply and inflation in
inflation in the jordanian economy
jordanian
economy

12 Money Supply Dinh Doan Analysis

and inflation van(2018) relationship
impacts on between money
economy growth supply and inflation
by collected data in
period of 2012 -
2016

13 An Analysis o YULIADI analyzing factors MV = PT Analysis using

Money Supply in (2020) that influence the M = Money supply Vector

50
 Indonesia: Vector money supply and V = Velocity of money Autoregressive
Autoregressive to what extent the P = Price (VAR)
(VAR) Approach economic factors T = Trade
affect the money
supply in Indonesia

14 MONEY Laxman investigate the Gross domestic Produc Using Vector Error
SUPPLY AND Gnawali effects of money (GDP), Narrow Money Correction Mode
ECONOMIC (2019) supply on economic (M1), Broad Money (VECM) and
GROWTH OF growth of Nepa (M2) and foreign Causality test to
NEPAL over the period 1975 assistant (FA). make a conclusion
to 2016

15 Analysis of Augustine and To examine the Interest rate Price level

determinants o Phillips (2018) interdependencies GDP income, and
money supply in among money Price level interest rate
Nigeria supply, interest rate Income level have a positive
price level, and FDI effect on
output (income) in money supply
Nigeria. while interes
rate and FDI
have a

51
 negative
impact on
money supply.

16 Money supply Muhammad To examine how Interest rate ARDL GDP has a
and economic Lokman economic activities Industrial production positive and
activities in Hakimi (2021) affects the direction index significant
Malaysia of money supply in Consumer price index effect on
Malaysia money supply.
Price and
interest rate
have a positive
and significan
effect on
money supply
in short run

17 The B. E. A. Alhaj to examine the GDP growth, exchange Auto-Regressive real GDP and

52
Determinants of A. Y. Abker empirical evidence rate, domestic Distributed Lag real
Money Supply in M. A of the existence of a investment, inflation rate (ARDL) approach government
Sudan: Empirica Mohammed long-run and exports, cost of finance associated error spending
Assessment (2020) short-run foreign direct investmen correction method boost rea
Based on an relationship between and governmen (ECM) using money supply
Application o money supply and it spending Eviews package while rea
the (ARDL) is determinants in Version 10. exports
Model sudan decrease it
(1980-2016) but only in the
long run
Exchange rate
real domestic
investment,
inflation, and
foreign direc
investment
don't
significantly
affect rea
money supply.

53
54