Financial Development and the Effectiveness of Monetary Policy: New Evidence from Malaysia

Basa, Danie Eirieswanty Kamal; Karim, Zulkefly Abdul; Zaidi, Mohd Azlan Shah

doi:10.21315/aamj2019.24.2.2

Cited by 2 publications

(1 citation statement)

References 33 publications

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“…However, findings also demonstrated that financial market development reduced the impact of monetary policy in Thailand via bank lending channel. Basa et al (2019) concluded that a co-integration existed between financial development and gross capital formation on MP effectiveness in Malaysia over 1991–2016. The empirical result also revealed that financial development significantly worsened the MP effectiveness on inflation and output, indicating that the efficacy of MP has been limited by a more advanced financial system.…”

Section: Literature Reviewmentioning

confidence: 99%

Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

Azam

Khan

Saleem

2023

JFEP

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Purpose This study aims to explore the impact of monetary policy on bank lending rate with the moderating effects of financial sector development for eight Asian developing economics. Design/methodology/approach This study uses panel autoregressive distributed lag/pooled mean group estimation over the period ranging from 1980 to 2020. Findings The empirical results exhibit an inverse link between monetary policy measured by broad money supply on the bank lending rate, indicating that the increase in the money supply by the central bank lowers the demand for loans and thereby lowers the cost of loan. Moreover, financial sector development decreases the lending rate and thus lowers cost of loan. It is also noted that the interactive term of monetary policy by lending broad money supply and financial sector development showed a positive impact on the lending rate in selected Asian developing countries during the period under the study. Practical implications The outcomes have many relevant policy implications that stronger financial development sector contributes to the efficiency of monetary policy. Regulators and policymakers are therefore recommended to pursue greater financial sector development to lower the cost for fund searchers and to lower the cost of loans, money supply increase is suggested. Originality/value This study contributes to the extant literature on the factors affecting lending rate with the prime aims of monetary policy effectiveness. This study also included financial sector development with some other variables and an interactive term of monetary policy with financial development to have new insight impact of both on the lending rate in developing Asian economies.

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Section: Literature Reviewmentioning

confidence: 99%

Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

Azam

Khan

Saleem

2023

JFEP

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The relationship between financial development and effectiveness of monetary policy: new evidence from ASEAN-3 countries

Karim

Basa²,

Karim

2021

JFEP

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Purpose This paper aims to investigate the relationship between financial development (FD) and monetary policy effectiveness (MPE) on output and inflation in ASEAN-3 countries (Singapore, Malaysia and the Philippines). Design/methodology/approach This study uses an open economy structural vector autoregressive model to generate MPE. Then, an autoregressive distributed lagged (ARDL) model is used to analyze the effect of FD on MPE across countries. Findings The findings revealed that FD plays a different role in MPE across countries. In Malaysia, a more developed financial system tends to reduce the MPE on output, whereas in Singapore, results show that the more developed financial system (stock market capitalization) tends to increase MPE on output. However, in the Philippines, the main results show that the effect of FD (liquid liabilities) upon MPE on output is depending on the policy variable (interest rates or money supply). Originality/value This paper fills this gap by providing the first study of ASEAN-3 countries in examining how effective is a monetary policy in response to the development of the financial market across the country. Second, this paper considers two FD indicators, namely, the banking sector and capital market development in investigating its effect on MPE on output and inflation. Third, the authors construct the MPE in each country using a structural (identified) VAR model by aggregating the response of output growth and inflation rate on monetary policy changes (interest rate and money supply) using impulse–response function. Regarding this, the results of this study provide new empirical evidence and insight into the long debate on the relationship between FD and the MPE.

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Financial Development and the Effectiveness of Monetary Policy: New Evidence from Malaysia

Cited by 2 publications

References 33 publications

Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

Monetary policy effectiveness in Asian developing economies: the moderating role of financial sector development

The relationship between financial development and effectiveness of monetary policy: new evidence from ASEAN-3 countries

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