Lim, Ewe Ghee and Goh, SooKhoon (2011): Is Malaysia exempted from impossible trinity: empirical evidence from 1991-2009.
Download (889kB) | Preview
This paper examines Bank Negara Malaysia’s (BNM) monetary policy autonomy in 1991-2009, a period of volatile capital flows, during which BNM operated under several exchange regimes: managed floating; fixed exchange rates; and fixed exchange rates with selective capital controls. Using a modified version of the Brissimis, Gibson and Tsakalotos (2002) model, the paper’s empirical estimates show that the same-period offset coefficients are significantly less than unity under all regimes, indicating that the Malaysian central bank possesses some short-run control over monetary policy (even under fixed exchange rates). Although the long-run offset coefficient continues to be less than unity under managed floating, it is not significantly less than unity under fixed exchange rates. These results show that Malaysia is not exempted from the impossible trinity except in the very short-run. Perhaps one of the reasons Malaysia abandoned its US dollar exchange rate peg on 20 July 2005 to move back to managed floating is to increase its monetary policy independence. One implication of the Malaysian monetary policy experience is that managed floating with active sterilization may be a viable strategy for emerging market economies to deal with volatile capital flows.
|Item Type:||MPRA Paper|
|Original Title:||Is Malaysia exempted from impossible trinity: empirical evidence from 1991-2009|
|Keywords:||Offset Coefficient, Sterilization Coefficient, Monetary Autonomy, Impossible Trinity|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics|
|Depositing User:||soo khoon goh|
|Date Deposited:||09. May 2011 13:12|
|Last Modified:||13. Feb 2013 07:33|
Aizenman, J., D. Chinn, M., Ito, H., 2008. Assessing the Emerging Global Financial Architecture: Measuring the Trilemma‘s configurations over Time. NBER Working Paper 14533, National Bureau of Economic Research.
Argy, V. and Kouri, P. J. K., 1974. Sterilization Policies and the Volatility of International Reserves. in: Aliber, R.Z.(Eds.), National Monetary Policies and the International Financial System, Chicago, University of Chicago.
Bond, T. J., 1998. Capital Flows to Asia: The Role of Monetary Policy. Empirica, 25, 165-182.
Brissimis, S., Gibson, H., sakalotos E.. 2002. A Unifying Framework for Analyzing Offsetting Capital Flows and Sterilisation: Germany and the ERM. International Journal of Finance and Economics, 7, 63-78.
Cavoli, T., Rajan, R. S., 2005. The Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization, SCAPE Policy Research Working Paper Series 0518, National University of Singapore, Department of Economics, SCAPE.
Christensen, J., 2004. Capital Inflows, Sterilization and Commercial Bank Speculation: The case of the Czech Republic in the mid-1990s. IMF Working Paper No: wp/04/218, IMF.
Clarida, R., Jordi, G., Mark, G., 1997. Monetary Policy Rules in Practice: Some International Evidence. NBER Working Paper No.6254, National Bureau of Economic Research.
Clarida, R., Jordi, G., Mark, G., 1998. Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. NBER Working Paper No.6442, National Bureau of Economic Research.
Cumby, R. E., Obstfeld, M., 1981. Capital Mobility and the Scope for Sterilization: Mexico in the 1970s. NBER Working Paper No. 770. National Bureau of Economic Research.
Edison, H. J., 1983. The Effectiveness of Central Bank Intervention: A Survey of the Literature After 1982. Special Papers in International economics, No.18, Department of Economics, Princeton University, Princeton, New Jersey.
Emir, O. Y., Karasoy, A., Kunter K., 2000. Monetary Policy Reaction Function in Turkey. Discussion Paper, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
Fry, M. J.,1988. Monetary Policy in Pacific Basin Developing Economies, in: F. Maxwell (Eds.), Money, Interest, and Banking in Economic Development, Baltimore, Johns Hopkins University Press.
Gan, W. B., Kwek, K. T., 1994. Exchange Rates Intervention and Sterilization In Malaysia. Second Malaysian Econometric Conference, Istana Hotel, Kuala Lumpur, 22-23 June 1994.
Girton, L., Roper, D., 1977. A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience. American Economic Review, 67, 537-48.
Herring, R. J., Marston, R., 1977. Sterilization Policy: The trade off between Monetary Autonomy and Control Over Foreign Exchange Reserves. European Economic Review, 10, 325-43.
Hutchison, M. M.,1988. Monetary control with an exchange rate objective: The Bank of Japan, 1973–86. Journal of International Money and Finance, 7, 261–271.
Igor, L., Ana, M., Marko M., 2010. Capital Inflows and Efficiency of Sterilization – Estimation of Sterilization and Offset Coefficients. Crotian National Bank Working Paper W-24, Croatian National Bank
Kamas L., 1986. The balance of payments offset to monetary policy: monetarists, portfolio balance and Keynesian estimates for Mexico and Venezuela. Journal of Money, Credit and Banking, 18, 467–481.
Kearney, C., MacDonald, R., 1986. Intervention and sterilization under floating exchange rates: The UK 1973-83. European Economic Review, 30, 345–364.
Kim , G., 1995. Exchange Rate Constraints and Money Control in Korea, The Federal Reserve Bank of St Louis Working Paper 1995-011.
Kim, S., Yang, D.Y., 2009. International Monetary Transmission and Exchange Rate Regimes: Floaters vs Non-Floaters in East Asia. ADBI Working Paper Series No.81, Asian Development Bank Institute.
Kouri P., 1975. The hypothesis of offsetting capital flows. Journal of Monetary Economics, 1, 21–39.
Kouri, P., Michael, P., 1974. International Capital Flows and Portfolio Equilibrium, Journal of Political Economy, 82, 443-467.
Latifah, M. C., 2005. Globalization and the Operation of Monetary Policy in Malaysia, BIS Paper No. 23. Bank of International Settlements
Lim, C. S., 1998. Extent and Efficacy of Monetary Sterilization in the SEACEN Countries. The South East Asian Central Banks (SEACEN), Kuala Lumpur, Malaysia.
Mastropasqua, C., Micossi, S., Rinaldi. R., 1988. Interventions, Sterilization and Monetary Policy in European Monetary System Countries, 1979-87, in: F. Giavazzi, Micossi, S., Miller, M.,The European Monetary System, Cambridge University Press, Cambridge.
Moreno R., Spiegel, M. M., 1997. Are Asian economies exempt from the "impossible trinity?": evidence from Singapore. Federal Reserve Bank of San Francisco, Pacific Basin Working Paper Series, 97-01.
Neumann, M. J. M., 1978. Offsetting Capital Flows: A Reexamination of the German Case. Journal of Monetary Economics, 4, 131–142.
Neumann, M. J. M., 1984. Intervention in the Mark/Dollar Market: The Authorities‘ Reaction Function. Journal of International Money and Finance, 3, 223–239.
Obstfeld, M., 1980. Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970. NBER Working Paper Series No.494, National Bureau of Economic Research, Cambridge, Massachusetts.
Obstfeld, M., 1982. Can We Sterilize? Theory and Evidence. American Economic Review, 72, 45-50.
Obstfeld, M., 1983. Exchange Rate, Inflation and the Sterilization Problem. European Economic Review, 21, 161-89.
Ooi, S. K., 2008. Capital Flows and Financial Assets in Emerging Markets: Determinants, Consequences and Challenges for Central banks: the Malaysian Experience, BIS Papers No.44. Bank of International Settlements.
Ouyang, Alice Y., Rajan, R. S., 2005.Monetary Sterilization in China Since the 1990s: How Much and How Effective?Working paper No 0507, Centre for International Economic Studies, University of Adelaide.
Ouyang, A.Y., Rajan, R.S., Willett, T.D., 2007. Managing the Monetary Consequences of Reserve Accumulation in Asia. Working Paper No. 20/2007, Hong Kong Institute of Monetary Research.
Ouyang, Alice Y., Rajan, Ra. S., Willett, T. D., 2010. China as a reserve sink: the evidence from offset and sterilization coefficients. Journal of International Money and Finance, 29, 951-972.
Pasula, K., 1994. Sterilization, Ricardian Equivalence and Structural and Reduced-Form Estimates of the Offset Coefficient. Journal of Macroeconomics, 16, 683-699.
Porter, M.G., 1972. Capital Flows as an offset to Monetary Policy: The German Case. IMF Staff Papers, 395-424.
Savviides, A., 1998. Inflation and Monetary Policy in Selected West and Central Africa Countries. World Development, 26, 809-827.
Takagawa, I., 2005. An Empirical Analysis of the Impossible Trinity, in: Driver,R., Sinclair., Thoenissen, C., (Eds) Exchange Rates, Capital Flows & Policy, UK:Routledge
Umezaki, S., 2007. Monetary Policy in a Small Open Economy: The Case of Malaysia. The Developing Economies, XLV-4, 437-464.
Von H. J., 1989. Monetary Targeting with Exchange Rate Constraints: the Bundesbank in the 1980s. Federal Reserve Bank of St Louis Review, 71, 53–69.
Waheed, M., 2007. Central Bank Intervention, Sterilization and Monetary Independence: The Case of Pakistan, MPRA paper No. 2328.