The Relative Importance Of Monetary Policy Transmission Channels In Malaysia

Abstract

This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12- variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off the interest rate channel is found to be most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.

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