Is Malaysia exempted from impossible trinity: empirical evidence from 1991-2009
AbstractThis paper examines Bank Negara Malaysia’s (BNM) monetary policy autonomy in 1991-2009, a period of volatile capital flows, during which BNM operated under several exchange regimes: managed floating; fixed exchange rates; and fixed exchange rates with selective capital controls. Using a modified version of the Brissimis, Gibson and Tsakalotos (2002) model, the paper’s empirical estimates show that the same-period offset coefficients are significantly less than unity under all regimes, indicating that the Malaysian central bank possesses some short-run control over monetary policy (even under fixed exchange rates). Although the long-run offset coefficient continues to be less than unity under managed floating, it is not significantly less than unity under fixed exchange rates. These results show that Malaysia is not exempted from the impossible trinity except in the very short-run. Perhaps one of the reasons Malaysia abandoned its US dollar exchange rate peg on 20 July 2005 to move back to managed floating is to increase its monetary policy independence. One implication of the Malaysian monetary policy experience is that managed floating with active sterilization may be a viable strategy for emerging market economies to deal with volatile capital flows.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 30804.
Date of creation: Mar 2011
Date of revision:
Offset Coefficient; Sterilization Coefficient; Monetary Autonomy; Impossible Trinity;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-24 (All new papers)
- NEP-CBA-2011-05-24 (Central Banking)
- NEP-IFN-2011-05-24 (International Finance)
- NEP-MON-2011-05-24 (Monetary Economics)
- NEP-OPM-2011-05-24 (Open Economy Macroeconomics)
- NEP-SEA-2011-05-24 (South East Asia)
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