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The distributional consequences of monetary policy : evidence from Malaysia

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  • Domac, Ilker

Abstract

The author provides a descriptive analysis of credit and monetary policies in Malaysia and investigates the distributional consequences of monetary policy there by focusing on small and medium-size industries and large manufacturing firms. The author suggests that"payoff"or"default"risk - as captured by the spread between safe and risky debt - is still well above its pre-crisis level, underscoring the increased agency costs of external finance. The decline in lending activity in the first half of 1998 can be attributed to the reduced supply of bank credit relative to demand. Empirical results from vector autoregression on analysis demonstrates that monetary tightening disproportionately affects small and medium-sized enterprises. Moreover, monetary shocks contribute substantially more to small and medium-size firms'variance of production (71 percent) than to that of large manufacturing firms (30 percent). These findings corroborate the notion that small and medium-size industries face greater market imperfection, which in turn magnify the effects of a given policy shift. Policymakers should weigh the distributional consequences of policy actions and should consider measures to alleviate the disproportionate impact that market imperfections have on small and medium-size industries. Measures to alleviate information asymmetry in credit markets - including the promotion of cooperative or mutual guarantee schemes for small and medium-size enterprises -- are one useful option. Groups of firms in Southern Europe have made wide use of mutual guarantee schemes - usually within a specific industry - to provide a privately organized"insurance system"for lending banks that allows the banks to rely less on the assets of individual companies within the group in making loan decisions. The pooling effects of such a system would reduce the risk to the bank of default and would give members of the society an incentive to reveal information to the society that they might hesitate to give to the bank.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2170.

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Date of creation: 31 Aug 1999
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Handle: RePEc:wbk:wbrwps:2170

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Keywords: Economic Theory&Research; Financial Intermediation; Banks&Banking Reform; International Terrorism&Counterterrorism; Payment Systems&Infrastructure; Environmental Economics&Policies; Economic Stabilization; Financial Intermediation; Economic Theory&Research; Banks&Banking Reform;

References

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  1. Arturo Estrella & Frederic S. Mishkin, 1995. "The Term Structure of Interest Rates and Its Role in Monetary Policy for The European Central Bank," NBER Working Papers 5279, National Bureau of Economic Research, Inc.
  2. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
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  7. Anil K Kashyap & Jeremy C. Stein, 1997. "What Do a Million Banks Have to Say About the Transmission of Monetary Policy?," NBER Working Papers 6056, National Bureau of Economic Research, Inc.
  8. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
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  12. Ilan Goldfajn & Taimur Baig, 1999. "Monetary policy in the aftermath of currency crisis: the case of Asia," Textos para discussão 399, Department of Economics PUC-Rio (Brazil).
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  15. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  16. Lang, William W. & Nakamura, Leonard I., 1995. "'Flight to quality' in banking and economic activity," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 145-164, August.
  17. Donald P. Morgan, 1993. "Asymmetric effects of monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 21-33.
  18. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  19. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
  20. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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Citations

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Cited by:
  1. Pierre-Richard Agenor, 2002. "Business Cycles, Economic Crises, and the Poor," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(3), pages 145-160.
  2. Eswar S. Prasad, 2013. "Distributional Effects of Macroeconomic Policy Choices in Emerging Market Economies," NBER Working Papers 19668, National Bureau of Economic Research, Inc.
  3. Alam, Tasneem & Waheed, Muhammad, 2006. "The monetary transmission mechanism in Pakistan: a sectoral analysis," MPRA Paper 2719, University Library of Munich, Germany, revised 13 Apr 2007.
  4. Tasneem Alam & Muhammad Waheed, 2006. "Sectoral Effects of Monetary Policy: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 1103-1115.
  5. Mohd Zaini Abd Karim & Amy Azhar Mohd Harif & Azira Adziz, 2006. "Monetary Policy and Sectoral Bank Lending in Malaysia," Global Economic Review, Taylor & Francis Journals, vol. 35(3), pages 303-326.
  6. Agenor, Pierre-Richard, 2001. "Business cycles, economic crises, and the poor : testing for asymmetric effects," Policy Research Working Paper Series 2700, The World Bank.
  7. Mala Raghavan & George Athanasopoulos & Param Silvapulle, 2009. "VARMA models for Malaysian Monetary Policy Analysis," Monash Econometrics and Business Statistics Working Papers 6/09, Monash University, Department of Econometrics and Business Statistics.
  8. Hsiao Chink Tang, 2006. "The Relative Importance Of Monetary Policy Transmission Channels In Malaysia," CAMA Working Papers 2006-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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