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ABSTRACT This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12-variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off, the interest rate channel is found to be the most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.

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    ABSTRACT: Studies on Malaysia monetary policy mostly examine the effect of monetary policy change on output and inflation in aggregate terms. While sectoral output effects of monetary policy have also been investigated, there is however a lack in the study on the effect of policy change on disaggregated inflation. This paper attempts to examine the later issue by employing structural vector autoregressive (SVAR) model. By estimating the model separately for each sub-group of Malaysian consumer price index, we find that a modest monetary policy shock results in varying degree of responses in disaggregated inflation. In other words, some sub-group inflation react instantly while others respond sluggishly to a monetary policy shock. In contrast to aggregate inflation response, there is also evidence of price puzzle. The results give some insight to monetary authority on how to control inflation in aggregate as well as in disaggregate terms and in turn manage the cost of living issues in Malaysia.
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    ABSTRACT: As the Chinese economy becomes more open and the authorities scrapped the peg to the U.S. dollar in July 2005, exchange rate movements start to influence the price inflation in China in a significant way. This paper estimates a structural vector autoregression (SVAR) model to investigate the impact of exchange rate changes on prices in the presence of domestic monetary policy influence for China. We find that (i) the exchange rate pass-through (ERPT) to the producer price index (PPI) and retail price index (RPI) are generally incomplete; (ii) the ERPT to the PPI is higher than that to the RPI; (iii) the ERPT to the PPI and the RPI are relatively rapid. The SVAR evidence suggests that exchange rate stability plays a unique and significant role for price stability in China.
    Economic Modelling 07/2013; 33:900-912. DOI:10.1016/j.econmod.2013.05.021 · 0.70 Impact Factor
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    ABSTRACT: This article conducts an in-depth investigation into building a Structural Vector Autoregression (SVAR) model and analysing the Malaysian monetary policy. Considerable attention is paid to: (i) the selection of foreign, policy and target variables; (ii) establish identifying restrictions and improve the estimates of impulse response functions; (iii) assess the importance of intermediate channels in transmitting monetary policy mechanism; and (iv) the way in which the 1997 Asian financial crisis affected the working of monetary policy. Malaysia is an interesting small open economy to study because, following this crisis, the government imposed capital and exchange rate control measures. The overall results suggest that the crisis and the subsequent major shift in the exchange rate regime have significantly affected the Malaysian ‘Black Box’. In the pre-crisis period, domestic variables appear to be more vulnerable to foreign monetary shocks. Further, the exchange rate played a significant role in transmitting the interest rate shocks, whereas credit and asset prices helped to propagate the money shock. In the post-crisis period however, asset prices play a more domineering role in intensifying the effects of both interest rate and money shocks on output, and the economy was insulated from foreign shocks.
    Applied Economics 10/2012; 44(29):3841-3856. DOI:10.1080/00036846.2011.581360 · 0.46 Impact Factor


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