Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia

Norlin Khalid (), Zulkefly Abdul Karim () and Izzuddin Yussof ()
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Norlin Khalid: School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA
Zulkefly Abdul Karim: School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA
Izzuddin Yussof: School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA

Jurnal Ekonomi Malaysia, 2014, vol. 48, issue 2, 19-27

Abstract: This paper estimates a nonlinear model of monetary policy reaction function by augmenting the standard Taylor rule equation for the case of Malaysia. Monetary policy reaction function is identified by which the BNM sets the current level of policy rates after observing the current level of output, inflation and exchange rate, and lags of these variables (backward looking). Using quarterly time series data set spanning from 1991 to 2014, the findings support the relevance of Taylor rule in which the Bank Negara Malaysia (BNM) sets their policy rates based on both inflation and output growth. In addition, the BNM has also considered the exchange rate in their reaction function.

Keywords: Taylor rule; inflation; interest rate; monetary policy (search for similar items in EconPapers)
Date: 2014
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