The Anatomy of Monetary Policy Transmission in an Emerging Market

Kodjovi Eklou

No 2023/146, IMF Working Papers from International Monetary Fund

Abstract: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.

Keywords: Monetary Policy; Emerging markets; Exchange rate; Credit; Inflation; Economic activity; Global monetary policy; monetary policy transmission; transmission of monetary policy; spillover effect; monetary policy shock; policy tool; Exchange rates; Monetary tightening; Central bank policy rate; Asset prices; Global (search for similar items in EconPapers)
Pages: 29
Date: 2023-07-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon, nep-opm and nep-sea
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