Article

THE RELATIVE IMPORTANCE OF MONETARY POLICY TRANSMISSION CHANNELS IN MALAYSIA

09/2006;
Source: RePEc

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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    • "For example, in the Malaysian context, Azali and Matthews (1999) and Ibrahim (2005) use a closed economy model in examining the effect of domestic monetary policy shocks on economic activities, and find that there is a real effect of monetary policy. In comparison, Tang (2006) employs an open-economy recursive VAR model in examining the relative importance of the monetary policy transmission mechanism channels (interest rates, credit, asset price, and exchange rate channel). His study concludes that the interest rate channel plays a pivotal role in influencing output and inflation. "
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    ABSTRACT: This paper examines the relative importance of Singapore, US and Japanese macroeconomic shocks on Malaysian economy. Employing structural vector auto regression (SVAR) model with a sign restriction approach, the study estimates four models. Each model consists of four domestic macroeconomic variables (output, inflation, interest rate and exchange rate) and three foreign variables (output, inflation and interest rate) of US, Japan, Singapore and the all countries trade-weighted variables, respectively. The results of the study reveal that, relative to domestic shocks, foreign shocks appear to play more prominent role in influencing domestic macroeconomic variables. Among the three foreign countries being investigated, the effect of shock of Singapore is the most dominant. The US effect comes second and the Japanese effect comes last. When Singapore's variables are the only foreign factors in the system, their shocks bring about significant variation to Malaysian variables especially the output. Consequently, in modeling the effect of foreign factors on Malaysian economy, Singapore effect should be taken into account. This is important as Singapore is not only one of Malaysia's long-term major trading partners, but it is also one of the Malaysia's closest neighbors by geographical distance.
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    • "As defined, an increase in the exchange rate means that the domestic currency which is the Ringgit Malaysia (RM) appreciates relative to the currencies of its major trading partners. A similar variable has been used by Domac (1999); however Ibrahim (2005) uses the nominal effective exchange rate, while Tang (2006) uses the nominal bilateral RM/USD exchange rate. "
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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.
    Full-text · Article · Jan 2011
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    • "Our aim is also to overcome the economic puzzles observed by earlier empirical studies. See for example, Azali and Matthews (1999), Fung (2002) and Tang (2006). Using monthly data from January 1980 to May 2006, a ninedimensional SVAR model -which includes both the domestic and foreign variables -was set up to study the dynamic responses of the Malaysian economy to domestic and foreign shocks. "
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    ABSTRACT: This paper employs a structural vector autoregression (SVAR) model to investigate the monetary policy framework of a small emerging open economy -Malaysia, especially how the economy dynamically respond to money, interest rate, exchange rate and foreign shocks. We establish identification conditions to uncover the dynamic effects of monetary policy shocks on various domestic variables. Following the financial crisis in July 1997, Malaysia adopted a pegged exchange regime in September 1998. By analysing the intensity of the responses of the domestic variables to various monetary shocks, we aim to find out whether the Malaysian monetary transmission mechanism has changed in the post-crisis period. Using monthly data from January 1980 to May 2006, a nine variable SVAR model is established to study the dynamic responses of the Malaysian economy to domestic and foreign shocks. The empirical results show notable differences: in the pre-crisis period, monetary policy and exchange rate shocks significantly affect the output, price, money, interest rate and exchange rate, while, in the post-crisis period, only the money shock tends to have stronger influence on output. Moreover, the domestic monetary policy appear to be far more vulnerable to foreign shocks especially the world commodity price shock and output shock in the post-crisis than in the pre-crisis period. The findings clearly indicate that the crisis has changed the role of the monetary transmission channels in propagating various policy shocks to the real sectors of the Malaysian economy.
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