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VARMA models for Malaysian Monetary Policy Analysis

Mala Raghavan (), George Athanasopoulos () and Param Silvapulle ()

No 6/09, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: This paper establishes vector autoregressive moving average (VARMA) models for Malaysian monetary policy analysis by efficiently identifying and simultaneously estimating the model parameters using full information maximum likelihood. The monetary literature is largely dominated by vector autoregressive (VAR) and structural vector autoregressive (SVAR).models, and to the best of our knowledge, this is the first paper to use VARMA modelling to investigate monetary policy. Malaysia is an interesting small open economy to study because of the capital control measures imposed by the government following the 1997 Asian financial crisis. A comparison of the impulse responses generated by these three models for the pre- and post-crisis periods indicates that the VARMA model impulse responses are consistent with prior expectations based on economic theories and policies pursued by the Malaysian government, particularly in the post-crisis period. Furthermore, uncovering the way in which various intermediate channels work would help Bank Negara Malaysia to steer the economy in the right direction so that monetary policy can still remain an effective policy measure in achieving sustainable economic growth and price stability.

Keywords: VARMA models; Identification; Impulse responses; Open Economy; Transmission mechanism (search for similar items in EconPapers)
JEL-codes: C32 E52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sea
Date: 2009-08
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