CHARACTERIZING THE MONETARY TRANSMISSION MECHANISM IN A SMALL OPEN ECONOMY: THE CASE OF MALAYSIA

Wee Beng Gan and Lee Ying Soon ()
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Wee Beng Gan: CIMB Investment Bank, Kuala Lumpur, Malaysia
Lee Ying Soon: Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore

The Singapore Economic Review (SER), 2003, vol. 48, issue 02, 113-134

Abstract: This paper evaluates the monetary policy response of Malaysia's central bank and the nature of monetary transmission mechanism in the 1990s when the exchange rate was on a managed float and the capital account was open. Structural vector autogression analysis is employed to evaluate how the central bank sets short term interest rates taking into consideration the constraints faced in adjusting the policy instrument to shocks to the economy. The impulse response functions and the variance decomposition indicate that the central bank preferred to use foreign exchange intervention rather than interest rate to stabilize the ringgit exchange rate. The results suggest that a sustained high level of interest rates would have caused a prolonged and deep contraction in output during the East Asian financial crisis.

Keywords: Monetary policy; Monetary transmission; East Asia financial crisis (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0217590803000670

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