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Jurnal Ekonomi Malaysia

48 (2) 2014 19 – 27

Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia
Menguji Model Bukan Linear Fungsi Tindak Balas Dasar Monetari: Kajian di Malaysia

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

nrlin@ukm.edu.my

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

zak1972@ukm.edu.my

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

izzuddinyussof@gmail.com

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.

Keywords

inflation; interest rate; monetary policy; Taylor rule

Author’s Acknowledgement

This research was funded by a University Research Grant under Geran Galakan Penyelidik Muda (GGPM), Universiti Kebangsaan Malaysia (UKM). (Project code: GGPM-20B-005)

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Khalid, , Abdul Karim, , & Yussof, (2014). Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia. Jurnal Ekonomi Malaysia, 48(2), 19–27.

@article{khalid2014testing,
  title={Testing a Non-Linear Model of Monetary Policy Reaction Function: Evidence from Malaysia},
  author={Khalid, Norlin and Abdul Karim, Zulkefly and Yussof, Izzuddin},
  journal={Jurnal Ekonomi Malaysia},
  volume={48},
  number={2},
  pages={19—27},
 

year={2014},
}

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