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

Author/Editor: Selim Elekdag ; Subir Lall ; Harun Alp
Publication Date: January 01, 2012
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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.
Series: Working Paper No. 12/35
Subject(s): Economic models | Emerging markets | Exchange rate depreciation | Exchange rate regimes | Flexible exchange rates | Global Financial Crisis 2008-2009 | Monetary policy

Author's Keyword(s): Financial accelerator | Bayesian estimation | DSGE model | financial crises | sudden stops | monetary policy | Malaysia | emerging markets.
Publication Date: January 01, 2012
ISBN/ISSN: 9781463933203/1018-5941 Format: Paper
Stock No: WPIEA2012035 Pages: 22
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