Nonlinear monetary policy reaction function in Malaysia: Evidence using a Markov Switching Vector Autoregression

Norlin Khalid, Mohd Alim Safwan Ahmad, Hakimah Nur Ahmad Hamidi

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Monetary policy reaction function or the so called feedback rule explains how the monetary authority accommodates economic developments and business cycles by altering its policy rule. This monetary policy reaction function plays an important role in macroeconomic analysis by the virtue of stabilization policy as well as growth strategy tools. However, there is a possibility that this feedback rule responses actively or passively towards economic activity. Hence, this study empirically estimates a monetary policy reaction function for Malaysia during the period 1971 - 2015. Hence, a Markov Switching Vector Autoregression is utilised by taking into account active and passive regime policies' rules. The results verify the pertinence of Taylor rule in the monetary feedback rule for Malaysia. They also show that inflation, output gap and exchange rate affect the policy rate for the establishment of optimal policy rate. Using economic validation, we prove that our model is robust and coincide with the real data.

Original languageEnglish
Pages (from-to)189-203
Number of pages15
JournalInternational Journal of Economics and Management
Volume12
Issue number1
Publication statusPublished - 1 Jun 2018

Fingerprint

Feedback rules
Malaysia
Monetary policy reaction function
Vector autoregression
Markov switching
Policy rules
Authority
Macroeconomics
Output gap
Economic development
Business cycles
Economics
Taylor rule
Stabilization policy
Inflation
Economic activity
Optimal policy
Exchange rates
Growth strategy

Keywords

  • Interest rates
  • Markov Switching Vector Autoregression
  • Monetary policy

ASJC Scopus subject areas

  • Business and International Management
  • Economics, Econometrics and Finance(all)
  • Strategy and Management

Cite this

Nonlinear monetary policy reaction function in Malaysia : Evidence using a Markov Switching Vector Autoregression. / Khalid, Norlin; Ahmad, Mohd Alim Safwan; Hamidi, Hakimah Nur Ahmad.

In: International Journal of Economics and Management, Vol. 12, No. 1, 01.06.2018, p. 189-203.

Research output: Contribution to journalArticle

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