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

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  • Selim Elekdag
  • Subir Lall
  • Harun Alp

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/35.

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Length: 22
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/35

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Keywords: Emerging markets; Economic models; Monetary policy; Exchange rate depreciation; Exchange rate regimes; Flexible exchange rates; Global Financial Crisis 2008-2009; exchange rate; exchange rate regime; exchange rate flexibility; fixed exchange rate regime; inflation; fixed exchange rate; flexible exchange rate; monetary policy framework; flexible exchange rate regime; central bank; monetary fund; monetary policy regime; nominal exchange rate; real exchange rate; monetary transmission; monetary transmission mechanism; exchange rate volatility; reserve requirements; aggregate demand; monetary authority; monetary economics; exchange rate policy; monetary shocks; exchange rate shock; nominal exchange rate depreciation; monetary policy regimes; exchange rate movements; exchange rate adjustments; monetary policies; foreign exchange; discretionary monetary policy; exchange rate peg; exchange rates; exchange rate pass;

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References

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  1. Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications 4367, Inter-American Development Bank, Research Department.
  3. Vasco Cúrdia, 2007. "Monetary policy under sudden stops," Staff Reports 278, Federal Reserve Bank of New York.
  4. Subir Lall & Selim Elekdag & Harun Alp, 2012. "Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008-2009?," IMF Working Papers 12/5, International Monetary Fund.
  5. Javier García-Cicco, 2010. "Estimating Models for Monetary Policy Analysis in Emerging Countries," Working Papers Central Bank of Chile 561, Central Bank of Chile.
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Cited by:
  1. Jean Pierre Allegret, 2012. "Responses of Monetary Authorities in Emerging Economies to International Financial Crises: What Do We Really know?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 3-32.

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