Monetary Policy and External Factors: Empirical Evidence for Association of Southeast Asian Nations 3

Pei-Tha Gan (), Nyuk-Ling Lee, Mohammed Yahya Mohammed Hussin and Norimah Rambeli
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Nyuk-Ling Lee: Department of Economics, Faculty of Management and Economics, Universiti Pendidikan Sultan Idris (Sultan Idris Education University), 35900 Tanjong Malim, Perak, Malaysia
Mohammed Yahya Mohammed Hussin: Department of Economics, Faculty of Management and Economics, Universiti Pendidikan Sultan Idris (Sultan Idris Education University), 35900 Tanjong Malim, Perak, Malaysia,
Norimah Rambeli: Department of Economics, Faculty of Management and Economics, Universiti Pendidikan Sultan Idris (Sultan Idris Education University), 35900 Tanjong Malim, Perak, Malaysia.

International Journal of Economics and Financial Issues, 2016, vol. 6, issue 4, 1585-1590

Abstract: The motivation for this paper is the external factors can be the important objectives of the monetary policy in a small open economy. This study will extend the standard Taylor rule that initially encompassed output and inflation by adding the exchange rate and terms of trade (TOT). By using the augmented Taylor rule, this paper examines exchange rates and TOT and determines its empirical validity based on a sample of Association of Southeast Asian Nations 3 countries. Using the technique of unrestricted error correction model, the findings provide some policy implications; the uncertain movements of the exchange rate and TOT can be fine-tuned by the central bank's interest rate instrument, and the inflation and output are useful policy indicators for monetary decision making of central bank, which eventually promotes the best economic outcomes

Keywords: Exchange Rate; Monetary Policy; Taylor Rule; Terms of Trade (search for similar items in EconPapers)
JEL-codes: C61 E58 E61 F41 (search for similar items in EconPapers)
Date: 2016
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