Monetary Policy and Commercial Banks: An Overview

Abdul Ismail and Peter Smith
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Abdul Ismail: Fakulti Ekonomi' Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor Darul Ehsan
Peter Smith: Fakulti Ekonomi' Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor Darul Ehsan

Jurnal Ekonomi Malaysia, 1993, vol. 27, 29-55

Abstract: The relationship between monetary policy and economic activity is one of the basic questions of macroeconomics. Economists have addressed this question in a number of ways. The traditional approach focuses on the importance of the liability side of the bank balance sheet. However, the traditional approach becomes less relevant as the number of substitutes for conventionally defined money increases in consumer’s portfolio. Recently, discussion on this relationship has gone further to include both credit rationing and bank structure. Interest has also grown in exploring the possible links between Islamic banks and monetary policy, and the deregulation process in the banking system. As a result, the role of money supply as an operating target of monetry policy has been undermined. The deregulation of commercial banks has changed the transmission mechanism for monetry policy from money supply to interest rates and bank credit.

Date: 1993
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