Consumption correlation and international capital market integration: evidence from Malaysia

Abstract

By evaluating the Malaysian consumption patterns, this article measures capital mobility in Malaysia with three main trading countries, namely the United States, Japan and Singapore. The results indicate that Malaysia's national consumption was fully integrated with the United States over the period 1960–2000. Since the consumption models are based on a high degree of capital mobility, there is some evidence that this condition is met in the Malaysian data. This indicates that Malaysia exhibited a substantial amount of financial openness despite periodic exchange controls.

Acknowledgements

This article is based on a chapter of the PhD thesis at the University of Melbourne, Australia. The author would like to thank the supervisory committee, Guay Lim and Nilss Olekalns. In addition, this article has benefited from Tuck Cheong Tang's helpful comments. Any remaining errors or omissions are the responsibility of the author.

Notes

¹ See Bayoumi and McDonald (1995) for a more detailed discussion of these issues.

² The choice of instruments is important in using the GMM method. In order to better gauge the robustness of the results, we used several sets of instrumental variables defined as follows. Instrumental variable set I, (i) home and foreign lagged value of income. (ii) foreign lagged value of consumption. Instrumental variable set II, (i) home and foreign lagged value of income, (ii) home and foreign lagged value of consumption. Instrumental variable set III, (i) home and foreign lagged value of the change in income, (ii) home and foreign lagged values of the change in consumption, (iii) home and foreign ratio of consumption to income. Only second order lagged values of the instrumental variables will be used in this study. The first lags cannot be used as instruments because the data is measured as an average rather than at a given point in time, thus introducing a correlation between the change in consumption and its first lag (Bayoumi and MacDonald, 1995).

³ According to the Bank Negara (1999), these are the three major trading partners with Malaysia.