Economic Bulletin Vol.

9, 17-40, 2008

Factors Affecting Malaysian Interest

Rate: Domestic vs. External
Mahyudin Ahmad

ABSTRACT

The paper investigates the factors affecting domestic interest rates in Malaysia
for a period beginning 1990s when the liberalisation of Malaysian financial
market commenced. The short- and long-run behaviour of interest rates (3-
month and 12-month Treasury Bills) are studied using a cointegration and
error correction model capturing both domestic and external factors. The
empirical results show robust long term equilibrium relationship of the interest
rates and provide evidence on the correction of fluctuations over the long run
to its equilibrium. The findings also suggest that domestic factors outweigh
foreign influence on the domestic rates.

Keywords: interest rate, financial deregulation, cointegration, error correction

model.

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