Skip to main content
SpringerLink
Log in

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

  • Published:
Empirical Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11
Fig. 12
Fig. 13
Fig. 14
Fig. 15
Fig. 16

Similar content being viewed by others

Notes

  1. We also computed the DIC measure for a VAR-SV with a Minnesota (or non-informative) prior for the fixed coefficients. We found that the DIC measure (\(\text{ DIC }=864.42\) and \(p_{D}=61.07\)) to be very similar to the VAR-SV reported in Table 2.

References

  • Alonso-Carrera J, Kam T (2015) Anatomizing incomplete-markets small open economies: policy trade-offs and equilibrium determinacy. Macroecon Dyn 20:1022–1050

    Article  Google Scholar 

  • Athanasopoulos G, Raghavan M, Silvapulle P (2012) Structural VAR models for Malaysian monetary policy analysis during the pre- and post-1997 Asian crisis periods. Appl Econ 44(29):3841–3856

    Article  Google Scholar 

  • Athukorala PC (2010) Malaysian economy in three crises. Departmental working papers 2010–2012, The Australian National University, Arndt-Corden Department of Economics

  • Athukorala PC, Jongwanich J (2012) How effective are capital controls? Evidence from Malaysia. Asian Dev Rev 29(2):1–47

    Google Scholar 

  • Baumeister C, Peersman G (2013) Time-varying effects of oil supply shocks on the US economy. Am Econ J Macroecon Am Econ Assoc 5(4):1–28

    Article  Google Scholar 

  • Benati L (2008) The great moderation in the United Kingdom. J Money Credit Bank 40(1):121–147

    Article  Google Scholar 

  • Benati L, Mumtaz H (2007) U.S. evolving macroeconomic dynamics: a structural investigation. Working paper series 0746, European Central Bank

  • Bernanke BS, Mihov I (1998) Measuring monetary policy. Q J Econ 113(3):869–902

    Article  Google Scholar 

  • Canova F, De Nicolo G (2002) Monetary disturbances matter for business fluctuations in the G-7. J Monet Econ 49:1131–1159

    Article  Google Scholar 

  • Canova F, Gambetti L (2009) Structural changes in the US economy: is there a role for monetary policy? J Econ Dyn Control 33:477–490

    Article  Google Scholar 

  • Chan J, Eisenstat E (2016) Chan J, Eisenstat E (2016) Bayesian model comparison for time-varying parameter VARs with stochastic volatility. ANU working paper

  • Chan J, Jeliazkov I (2009) Efficient simulation and integrated likelihood estimation in state space models. Int J Math Model Numer Optim 1:101–120

    Google Scholar 

  • Chan J, Hsiao C (2014) Estimation of stochastic volatility models with heavy tails and serial dependence. In: Jeliazkov I, Yang X-S (eds) Bayesian inference in the social sciences. Wiley, Hoboken, pp 159–180

    Google Scholar 

  • Christiano LJ, Eichenbaum M, Evans C (1999) Monetary policy shocks: What have we learned and to what end? In: Woodford M, Taylor J (eds) Handbook of macroeconomics, vol 1. Elsevier Science, New York, pp 65–148

    Chapter  Google Scholar 

  • Cross J, Poon A (2016) Forecasting structural change and fat-tailed events in Australian macroeconomic variables. Econ Model 58:34–51

    Article  Google Scholar 

  • D’Agostino A, Gambetti L, Giannone D (2013) Macroeconomic forecasting and structural change. J Appl Econ 28(1):82–101

    Article  Google Scholar 

  • Domac I (1999) The distributional consequences of monetary policy: evidence from Malaysia. World bank policy research working papers

  • Ellis C, Mumtaz H, Zabczyk P (2014) What lies beneath? A time-varying FAVAR model for the UK transmission mechanism. Econ J 124(576):668–699

    Article  Google Scholar 

  • Faust J (1998) The robustness of identified VAR conclusions about money. Carnegie-Rochester conference series on public policy, vol 49, pp 207–244

  • Franta M, Horvath R, Rusnak M (2014) Evaluating changes in the monetary transmission mechanism in the Czech Republic. Empir Econ 46(3):827–842

    Article  Google Scholar 

  • Fung SC (2002) A VAR analysis of the effects of monetary policy in East Asia. Working paper, Bank of international settlement

  • Geweke J (1992) Evaluating the accuracy of sampling-based approaches to the calculation of posterior moments. In: Bernardo JM, Berger J, Dawid AP, Smith AFM (eds) Bayesian statistics 4. Oxford University Press, Oxford, pp 169–193

    Google Scholar 

  • Hanson M (2004) The “Price Puzzle” reconsidered. J Monet Econ 51:1385–1413

    Article  Google Scholar 

  • Ibrahim H (2005) Sectoral effects of monetary policy: evidence from Malaysia. Asian Econ J 19(1):83–102

    Article  Google Scholar 

  • Ito H, Chinn M (2016) Notes on the calculation of the Chinn-Ito financial openness variable. http://web.pdx.edu/~ito/Readme_kaopen2014.pdf

  • Ito T, Sato K (2008) Exchange rate changes and inflation in post-crisis Asian economies: vector autoregression analysis of the exchange rate pass-through. J Money Credit Bank 40(7):1407–1438

    Article  Google Scholar 

  • Johnston B, Tamirisa NT (1998) Why do countries use capital controls? IMF working paper no. 98/181, International Monetary Fund, Washington, DC

  • Koop G, Korobilis D (2010) Bayesian multivariate time series methods for empirical macroeconomics. Now Publishers Inc, Breda

    Google Scholar 

  • Koop G, Leon-Gonzalez R, Strachan RW (2009) On the evolution of the monetary policy transmission mechanism. J Econ Dyn Control 33(4):997–1017

    Article  Google Scholar 

  • Koop G, Pesaran MH, Potter SM (1996) Impulse response analysis in nonlinear multivariate models. J Econ 74:119–147

    Article  Google Scholar 

  • Mumtaz H, Sunder-Plassmann L (2013) Time-varying dynamics of the real exchange rate: an empirical analysis. J Appl Econ 28(3):498–525

    Article  Google Scholar 

  • Nakajima J, Kasuya M, Watanabe T (2011) Bayesian analysis of time-varying parameter vector autoregressive model for the Japanese economy and monetary policy. J Jpn Int Econ 25(3):225–245

    Article  Google Scholar 

  • Pitt MK, Shephard N (1999) Filtering via simulation: auxiliary particle filter. J Am Stat Assoc 94(446):590–599

    Article  Google Scholar 

  • Primiceri G (2005) Time varying structural vector autoregressions and monetary policy. Rev Econ Stud 72:821–852

    Article  Google Scholar 

  • Raghavan M, Silvapulle P (2008) Structural VAR approach to Malaysian monetary policy framework: evidence from the pre- and post-Asian crisis periods. New Zealand Association of Economics, NZAE conference 2008, paper no. 30.1, pp 1–32

  • Spiegelhalter DJ, Best NG, Carlin BP, Van der Linde A (2002) Bayesian measures of model complexity and fit. J R Stat Soc B 64(4):583–639

    Article  Google Scholar 

  • Tang HC (2006) The relative importance of monetary policy transmission channels in Malaysia. Centre for Applied Macroeconomic Analysis Working Paper Series, Crawford School of Public Policy, The Australian National University

  • Uhlig H (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. J Monet Econ 52:381–419

    Article  Google Scholar 

Download references

Acknowledgements

The author would like to acknowledge financial support by The Economic Society of Australia via the 2015 Peter Kenyon Memorial Postgraduate Scholarship. I would like to thank especially my supervisors Joshua C.C. Chan and Timothy Kam, and my fellow Ph.D. classmate Jamie Cross for helpful comments on the paper. Also, I would like to thank two anonymous referees comments, which helped improved the paper significantly. Lastly, I would like to thank Marylu Nelson for help in editing the paper.

Author information

Authors and Affiliations

  1. Research School of Economics, The Australian National University, HW Arndt Building 25A, Acton, ACT, 2601, Australia

    Aubrey Poon

Authors
  1. Aubrey Poon
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Aubrey Poon.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (pdf 465 KB)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Poon, A. The transmission mechanism of Malaysian monetary policy: a time-varying vector autoregression approach. Empir Econ 55, 417–444 (2018). https://doi.org/10.1007/s00181-017-1280-z

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-017-1280-z

Keywords

JEL Classification

Search

Navigation