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Has Financial Liberalization Reduced Liquidity Constraints in Malaysia? Some Empirical Results


  • Muzafar Shah Habibullah
  • Peter Smith


One of the important implications of financial liberalization is the reduction of liquidity constraints. The ability of households to borrow and adjust their financial portfolios has important implications for monetary aggregates and consequently, for the conduct of monetary policy. It is to be observed that the relationship between monetary aggregates and current income will be in a weakened state, in financially liberalized economies. The purpose of the present study is to investigate whether, financial liberalization has reduced liquidity constraints in Malaysia. To do this, an Euler equation has been estimated and an attempt has been made to determine whether, the estimates of l has been reduced in the deregulation era. The results suggest that the fraction of liquidity constrained consumers in Malaysia is quite substantial, and has, in fact, increased to more than 50% of the population in the 1980s-1990s. The study concludes that liquidity constraints have not been reduced as a result of financial liberalization in Malaysia. The important policy implication is that, fiscal policies such as, a temporary tax-cut or debt-finance fiscal spending, and the use of monetary aggregates as indicators of monetary policy can be effective in the presence of liquidity constraints.

Suggested Citation

  • Muzafar Shah Habibullah & Peter Smith, 2009. "Has Financial Liberalization Reduced Liquidity Constraints in Malaysia? Some Empirical Results," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 68-77, February.
  • Handle: RePEc:icf:icfjmo:v:07:y:2009:i:1:p:68-77

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    References listed on IDEAS

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