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The distributional consequences of monetary policy : evidence from Malaysia


  • Domac, Ilker


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.

Suggested Citation

  • Domac, Ilker, 1999. "The distributional consequences of monetary policy : evidence from Malaysia," Policy Research Working Paper Series 2170, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2170

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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Eswar S Prasad, 2014. "Distributional Effects of Macroeconomic Policy Choices in Emerging Market Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(3), pages 409-429, August.
    3. Muhammad Ayyoub, 2016. "Inflation-growth nexus in developing economies: New empirical evidence from a dis-aggregated approach," Economics working papers 2016-02, Department of Economics, Johannes Kepler University Linz, Austria.
    4. 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.
    5. Agenor, Pierre-Richard, 2001. "Business cycles, economic crises, and the poor : testing for asymmetric effects," Policy Research Working Paper Series 2700, The World Bank.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Malika Akhatova & Mohd Pisal Zainal & Mansor H. Ibrahim, 2016. "Banking Models and Monetary Transmission Mechanisms in Malaysia: Are Islamic Banks Different?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 169-183, June.


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