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The Monetary Policy Reaction Function: Evidence from Asean-3

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  • Pei-Tha, Gan

    ()
    (Faculty of Management and Economics Universiti Pendidikan Sultan Idris, 35900 Tanjong Malim, Perak, Malaysia)

  • Kian-Teng, Kwek

    (Faculty of Economics and Administration University of Malaya, 50603 Kuala Lumpur, Malaysia)

Abstract

The aim of this paper is to determine the central bank's reaction process. Our estimation of this process uses the extension of structural vector autoregression (SVAR) modelling based on the Svensson (2000) method. The idea that monetary policy is not only concerned with the output gap and inflation, but also with external variables, constitutes the basis for the analysis. Using data from Indonesia, Malaysia and Thailand, the empirical results indicate that the selected countries do care about inflation and the output gap. This is consistent with the central banks' position that: (i) price stability is the most important objective of monetary policy, (ii) the exchange rates and terms of trade, which impact central bank actions, are not, in reality, considered monetary policy objectives and (iii) interest rates are a useful measure for the monetary authorities' counter-cyclical policies.

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Bibliographic Info

Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

Volume (Year): 6 (2010)
Issue (Month): 1 ()
Pages: 1-24

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Handle: RePEc:usm:journl:aamjaf00601_1-24

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Web page: http://web.usm.my/aamj/
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Keywords: impulse response functions; reaction function; SVAR; and Taylor rule JEL Classifications:;

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