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Bank Lending Channel For Monetary Policy Transmission In Malaysia: An Ardl Approach


  • Kim-Leng GOH


  • Chin-Sieng CHONG
  • Sook-Lu YONG


The relevance of bank lending channel for the transmission process of monetary policy in Malaysia is investigated using the autoregressive-distributed lag (ARDL) model. The newly developed bounds test (Pesaran, et al. 2001) is employed to determine the specification of this model. Deposits tend to fall following contractionary monetary policy shocks, but banks are able to cushion their loan customers from the reduction in deposits through adjustments in liquid financial instruments. As such, these monetary shocks did not depress growth in loans. Although a shift is witnessed in the country’s interest rate regime as a policy response to the recent East Asian currency crisis, evidence was not found to support the effectiveness of the bank lending channel for the transmission of monetary policy.

Suggested Citation

  • Kim-Leng GOH & Chin-Sieng CHONG & Sook-Lu YONG, 2007. "Bank Lending Channel For Monetary Policy Transmission In Malaysia: An Ardl Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2).
  • Handle: RePEc:eaa:aeinde:v:7:y:2007:i:2_19

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    References listed on IDEAS

    1. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 631-653.
    2. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
    3. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    4. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
    5. Anita Doraisami, 2004. "From crisis to recovery: the motivations for and effects of Malaysian capital controls," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(2), pages 241-254.
    6. Gabe J. de Bondt, 2000. "Financial Structure and Monetary Transmission in Europe," Books, Edward Elgar Publishing, number 2015.
    7. Charles S. Morris & Gordon H. Sellon, 1995. "Bank lending and monetary policy: evidence on a credit channel," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 59-75.
    8. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    9. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    10. Dale, Spencer & Haldane, Andrew G., 1995. "Interest rates and the channels of monetary transmission: Some sectoral estimates," European Economic Review, Elsevier, vol. 39(9), pages 1611-1626, December.
    11. Garretsen, Harry & Swank, Job, 1998. "The Transmission of Interest Rate Changes and the Role of Bank Balance Sheets: A VAR-Analysis for the Netherlands," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 325-339, April.
    12. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18.
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    Cited by:

    1. Le Viet, H. & Pfau, W.D., 2009. "VAR Analysis of the Monetary Transmission Mechanism in Vietnam," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    2. Abdul Karim, Zulkefly & Wan Ngah, Wan Azman Saini & Abdul Karim, Bakri, 2010. "Bank lending channel of monetary policy: dynamic panel data evidence from Malaysia," MPRA Paper 26157, University Library of Munich, Germany.

    More about this item


    Bank deposits; Bank loans; Bounds test; Generalised Impulses; Interest rates;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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