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Granger-causal direction between crude oil and islamic deposits: Malaysian evidence

Omar, Kamal and Masih, Mansur (2016): Granger-causal direction between crude oil and islamic deposits: Malaysian evidence.

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The focus of this paper is to conduct empirical tests in order to confirm the dynamic causal chain in the Granger temporal sense among Islamic deposits, money, real output, the exchange rates and crude oil future prices in the context of Malaysia. This paper is an extension of the empirical test on macroeconomic activity conducted by Masih & Masih (1996).The standard time series methodology has been applied. Given the cyclical nature of crude oil prices, the results quite in line with the expectations, tend to suggest that in the Granger-causality sense, with WTI futures prices as stimulant, money supply (particularly M1) and interest rate appear to have played the role of policy variables and other variables including output, exchange rate and Islamic deposits (highly regulated) appear to have gone through the short-run adjustment endogenously in different proportions in order to re-establish the long-run equilibrium with Islamic Deposit. This finding has clear policy implications in the sense that the up and down of the oil prices will not necessarily cause a wealth or income fluctuation to a developing economy (such as real output and saving) but will contribute positively to assist in achieving an impressive rate of economic growth with stable cash deposits, as reflected in Malaysia for the major part of the period under review.

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