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Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia

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  • Abdul Majid, Muhamed Zulkhibri

Abstract

The paper explores the measurement of monetary condition in Malaysia to augment the existing monetary policy framework. As an open economy, Monetary Condition Index (MCI) and Financial Condition Index (FCI) are applicable to understand the monetary condition especially in the era of financial deregulation and liberalisation. The results obtained suggest that the index is most useful when the exchange market exhibits stable conditions, and would be a constructive tool in the simultaneous management of the foreign currency and domestic money markets. However, the frequent experience of instability caused by supply and demand shocks with persistent and large inertia in the economy complicates the practical use of MCI and FCI in Malaysia. While this approach obviously does not provide answers to every question and as a leading indicator for inflation, it nonetheless makes it possible to measure the monetary condition in the Malaysian economy.

Suggested Citation

  • Abdul Majid, Muhamed Zulkhibri, 2010. "Measuring Monetary Conditions in A Small Open Economy: The Case of Malaysia," MPRA Paper 29154, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:29154
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    More about this item

    Keywords

    Monetary condition index; Monetary Policy; Malaysia;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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