This article conducts an in-depth investigation into building a Structural Vector Autoregression (SVAR) model and analysing the Malaysian monetary policy. Considerable attention is paid to: (i) the selection of foreign, policy and target variables; (ii) establish identifying restrictions and improve the estimates of impulse response functions; (iii) assess the importance of intermediate channels in transmitting monetary policy mechanism; and (iv) the way in which the 1997 Asian financial crisis affected the working of monetary policy. Malaysia is an interesting small open economy to study because, following this crisis, the government imposed capital and exchange rate control measures. The overall results suggest that the crisis and the subsequent major shift in the exchange rate regime have significantly affected the Malaysian ‘Black Box’. In the precrisis period, domestic variables appear to be more vulnerable to foreign monetary shocks. Further, the exchange rate played a significant role in transmitting the interest rate shocks, whereas credit and asset prices helped to propagate the money shock. In the post-crisis period however, asset prices play a more domineering role in intensifying the effects of both interest rate and money shocks on output, and the economy was insulated from foreign shocks.

Item Type:	Refereed Article
Keywords:	identification, impulse responses, open economy, monetary policy, SVAR models, intermediate channels
Research Division:	Economics
Research Group:	Applied Economics
Research Field:	Macroeconomics (incl. Monetary and Fiscal Theory)
Objective Division:	Economic Framework
Objective Group:	Macroeconomics
Objective Field:	Monetary Policy
Author:	Raghavan, M (Dr Mala Raghavan)
ID Code:	80644
Year Published:	2012
Web of Science® Times Cited:	9
Deposited By:	Economics and Finance
Deposited On:	2012-11-06
Last Modified:	2017-11-22
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