An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09

By Selim A Elekdag, Subir Lall, Harun Alp

January 1, 2012

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Selim A Elekdag, Subir Lall, and Harun Alp. An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09, (USA: International Monetary Fund, 2012) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM's monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

Subject: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Financial crises, Foreign exchange, Global financial crisis of 2008-2009

Keywords: Bayesian estimation, Conventional peg, Core CPI, Countercyclical interest rate cut, Countercyclical interest rate policy, Countercyclical monetary policy, Demand shock, DSGE model, Emerging markets, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Financial accelerator, Financial crises, Global, Global financial crisis of 2008-2009, Inflation rate, Interest rate change, Interest rate rule, Malaysia, Monetary policy, Monetary policy framework, Monetary policy shock, Open economy, Rate of exchange rate depreciation, Sudden stops, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/035
Stock No:

WPIEA2012035
ISBN:

9781463933203
ISSN:

1018-5941

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