Measuring monetary conditions in a small open economy: the case of Malaysia
Purpose - The purpose of the paper is to gauge the usefulness of the Monetary Condition Index (MCI) and Financial Condition Index (FCI) for the conduct of monetary policy in Malaysia. Design/methodology/approach - The MCI is constructed as the weighted sum of changes in the exchange rate and interest rate from their levels in a chosen base year. The weights are obtained by summing up the coefficients on the lags variables from estimating the determinants of backward-looking aggregate demand. Findings - The paper finds that the movement inflation induces the movement in either interest rate or exchange rate. The result also indicates that the interest rate channel is found to be more powerful than the exchange rate channel. The method in determining the weights for each policy component of the index however indicates some degree of instability due to some external shock affected the exchange rate or the domestic short-term interest rate. Originality/value - In a small open economy with deregulated markets, it is crucial to assess the combined effect of interest rate and exchange rate on monetary conditions and the conduct of monetary policy. Despite the index ability to explain monetary conditions in Malaysia, the estimate of MCI and FCI should be used cautiously. The index does not offer a precise signal on the state of monetary condition in Malaysia.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 4 (2012)
Issue (Month): 3 (July)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jfep.htm Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paulo Soares Esteves, 2003. "Monetary Conditions Index for Portugal," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Eika, Kari H & Ericsson, Neil R & Nymoen, Ragnar, 1996.
"Hazards in Implementing a Monetary Conditions Index,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 58(4), pages 765-790, November.
- Eika, K.H. & Ericsson, N.R. & Nymoen, R., 1996. "Hazards in Implementing a Monetary Conditions Index," Memorandum 32/1996, Oslo University, Department of Economics.
- Kari H. Eika & Neil R. Ericsson & Ragnar Nymoen, 1996. "Hazards in implementing a monetary conditions index," International Finance Discussion Papers 568, Board of Governors of the Federal Reserve System (U.S.).
- Andrew J Swiston, 2008. "A U.S. Financial Conditions Index; Putting Credit Where Credit is Due," IMF Working Papers 08/161, International Monetary Fund.
- Zulfiqar Hyder & Muhammad Mazhar Khan, 2007. "Monetary Conditions Index for Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 3, pages 165-190.
- Zulfiqar Hyder & Muhammad Mazhar Khan, 2006. "Monetary Conditions Index for Pakistan," SBP Working Paper Series 11, State Bank of Pakistan, Research Department.
- Charles Freedman, 1995. "The role of monetary conditions and the monetary conditions index in the conduct of policy [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Autumn), pages 53-59.
- Grégory Levieuge & Christophe Blot, 2008. "Are MCIs Good Indicators of Economic Activity ? Evidence from the G7 Countries," Sciences Po publications 2008-07, Sciences Po.
- Christophe Blot & Grégory Levieuge, 2008. "Are MCIS good indicators of economic activity? Evidence from the G7 countries," Documents de Travail de l'OFCE 2008-07, Observatoire Francais des Conjonctures Economiques (OFCE).
- Christophe Blot & Grégory Levieuge, 2008. "Are MCIs Good Indicators of Economic Activity ? Evidence from the G7 Countries," Working Papers hal-00973056, HAL.
- George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
- Stéphanie Guichard & David Turner, 2008. "Quantifying the Effect of Financial Conditions on US Activity," OECD Economics Department Working Papers 635, OECD Publishing.
- Caesar P Lack, 2003. "A financial conditions index for Switzerland," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 398-413 Bank for International Settlements.
- Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
- Ernst Fehr & Jean-Robert Tyran, "undated". "Does Money Illusion Matter?," IEW - Working Papers 012, Institute for Empirical Research in Economics - University of Zurich.
- Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
- David Mayes & Matti Virén, 2000. "The exchange rate and monetary conditions in the Euro area," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(2), pages 199-231, June.
- Mayes, David G. & Virén, Matti, 1998. "The exchange rate and monetary conditions in the euro area," Research Discussion Papers 27/1998, Bank of Finland.
- AfDB AfDB, . "AfDB Group Annual Report 2004," Annual Report, African Development Bank, number 60 edited by Koua Louis Kouakou.
- Siklos, Pierre L, 2000. "Is the MCI a Useful Signal of Monetary Policy Conditions? An Empirical Investigation," International Finance, Wiley Blackwell, vol. 3(3), pages 413-437, November.
- Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages 335-356, June.
- Céline Gauthier & Christopher Graham & Ying Liu, 2004. "Financial Conditions Indexes for Canada," Staff Working Papers 04-22, Bank of Canada.
- Peeters, Marga, 1999. "Measuring monetary conditions in Europe: Use and limitations of the monetary conditions index," MPRA Paper 23534, University Library of Munich, Germany.
- C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
- Nicoletta Batini & Kenny Turnbull, 2000. "Monetary Conditions Indices for the UK: A Survey," Discussion Papers 01, Monetary Policy Committee Unit, Bank of England. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:218-231. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If references are entirely missing, you can add them using this form.