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Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia

Author

Listed:
  • Khalid, Norlin

    (School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA)

  • Abdul Karim, Zulkefly

    (School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA)

  • Yussof, Izzuddin

    (School of Economics Faculty of Economics and Management Universiti Kebangsaan Malaysia 43600 Bangi, Selangor D.E. MALAYSIA)

Abstract

This paper estimates a nonlinear model of monetary policy reaction function by augmenting the standard Taylor rule equation for the case of Malaysia. Monetary policy reaction function is identified by which the BNM sets the current level of policy rates after observing the current level of output, inflation and exchange rate, and lags of these variables (backward looking). Using quarterly time series data set spanning from 1991 to 2014, the findings support the relevance of Taylor rule in which the Bank Negara Malaysia (BNM) sets their policy rates based on both inflation and output growth. In addition, the BNM has also considered the exchange rate in their reaction function.

Suggested Citation

  • Khalid, Norlin & Abdul Karim, Zulkefly & Yussof, Izzuddin, 2014. "Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 48(2), pages 19-27.
    • Handle: RePEc:ukm:jlekon:v:48:y:2014:i:2:p:19-27
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    References listed on IDEAS

    as
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