The transmission mechanism of Malaysian monetary policy: a time-varying vector autoregression approach

Aubrey Poon

Empirical Economics, 2018, vol. 55, issue 2, No 3, 417-444

Abstract: Abstract The aim of this paper is to determine whether the propagation and transmission mechanism of Malaysian monetary policy differed during the Asian Financial Crisis of 1997/1998 and the Global Financial Crisis of 2007/2008. The methodology employs a time-varying vector autoregression framework. The primary result is that despite having no evidence of time-variation within the propagation mechanism of Malaysian monetary policy the average contribution of a monetary policy shock to the variability of each macroeconomic variable: real GDP, inflation and the nominal effective exchange rate, differs between the two crises. This finding suggests that despite the propagation mechanism being relatively constant, Malaysia’s monetary policy transmission mechanism evolves over time. We believe that the main mechanism driving this evolution is the time-variation in the variance–covariance matrix of the shocks of the model, not the coefficients. We also find some evidence that the implementation of capital controls reduced the influenceability of monetary policy on the Malaysian economy.

Keywords: Malaysia; Monetary policy; Time-varying; Sign restrictions; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E31 E32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00181-017-1280-z

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