Malaysian monetary transmission mechanism: Evidence from the pre- and post-Asian financial crisis periods

In this paper, we use vector autoregressive (VAR) models to characterise the Malaysian monetary policy and to investigate the roles of money, interest rate, credit, asset price and exchange rate channels in the Malaysian monetary transmission mechanism. 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. We establish foreign block exogeneity restrictions, both contemporaneously and in the lag structure to uncover the dynamic effects of monetary policy shocks on various domestic variables during the pre- and post-crisis periods and compare the impulse responses generated under the different policy regimes. The overall results suggest that the crisis and the major shift in the exchange regime have affected the Malaysian monetary transmission mechanism. In the pre-crisis period, the Malaysian monetary policy appear to be more vulnerable to foreign shocks then in the post-crisis period; while the various intermediate monetary channels played a significant role in influencing the price level and thus help to propagate the monetary shock. In the post crisis period however, these channels play a more domineering role in intensifying the effects on output.