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An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09

Subir Lall (), Selim Elekdag and Harun Alp

No 2012/035, IMF Working Papers from International Monetary Fund

Abstract: Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM's monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

Keywords: WP; monetary policy; open economy; monetary policy framework; financial accelerator; Bayesian estimation; DSGE model; financial crises; sudden stops; Malaysia; emerging markets; rate of exchange rate depreciation; countercyclical monetary policy; interest rate rule; monetary policy shock; core CPI; inflation rate; interest rate change; countercyclical interest rate cut; countercyclical interest rate policy; demand shock; Exchange rate flexibility; Global financial crisis of 2008-2009; Exchange rate arrangements; Exchange rates; Conventional peg; Global (search for similar items in EconPapers)
Pages: 22
Date: 2012-01-01
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