An Examination of Monetary Aggregates in Cambodia: A Vector Autoregressive Model

Abstract

In order to investigate the movement of monetary aggregate in Cambodia, a system of equations known as the Vector Autoregression (VAR) model was adopted. The model included four endogenous variables, namely broad money, inflation rate, exchange rate, and interest rate. The study period covered from January 2002 to March 2023. The Augmented Dickey-Fuller test indicated that the money supply and consumer price index series were integrated of order one, I(1), while the exchange rate and interest rate were integrated of order zero, I(0). To avoid spurious results, all data series were transformed to first differences and the VAR model was run. The optimal lag length of the model was determined to be one lag, as indicated by the Schwarz Information Criterion. The impulse response function revealed that inflation rate had a positive impact on the movement of monetary aggregate, while exchange rate depreciation had a negative impact on monetary aggregate. In contrast, the movement of interest rate had a less significant influence on money supply. The forecast error variance decomposition over twelve months into the future showed that the variation of monetary aggregate was mainly explained by exchange rate fluctuation, followed by inflation rate, and the least variation was caused by interest rate.