THE TRANSMISSION MECHANISM OF MONETARY POLICY IN MALAYSIA: THROUGH BANK LOANS OR DEPOSITS?

We investigate the link between banking activities and macroeconomic performance in Malaysia with respect to the money and credit channel by studying the causal influence of banks’ assets and liabilities. The Granger causality analyses that we performed support the importance of the credit channel within the Malaysian economy. Significant causations are traced running from changes in loans issued by banks to economic variables. Limited evidence is found for the deposits. Parallel to the working of the credit channel, a one-way causation pattern from deposits to loans is identified. Thus, the Central Bank’s policies with respect to the availability of reservable deposits are transmitted to the economy via bank lending activities, supporting the credit channel explanations