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Main Page » Buku, Artikel, Jurnal, dst » Financial Reforms and Transmission Mechanism of Monetary Policy in The SEACEN Countries

Oct 6, 2011 8:58 AM
Financial Reforms and Transmission Mechanism of Monetary Policy in The SEACEN Countries

Cover Buku 1


Book title: Financial reforms and transmission mechanism of monetary policy in the SEACEN countries

By: Mulyana Soekarni

ISBN: 983-9553-43-7

Published by The South East Asian Central Banks (SEACEN) Research and Training Centre Kuala Lumpur, Malaysia


  • Chapter 1: Introduction
  • Chapter 2: Financial reforms and transmission mechanism of monetary policy in the SEACEN countries
  • Chapter 3: Methodology, analytical framework and empirical results
  • Chapter 4: Problems and issues in implementing monetary policy
  • Chapter 5: Observations and conclusions


Executive Summary

This in-house project studied the financial reforms in connection with the transmission mechanism of monetary policy in the SEACEN countries. In order to serve this purpose, the study uses both qualitative and quantitative approaches. Insofar as interest rate liberalisation is concerned, some member countries followed a drastic approach like in the case of Indonesia, Malaysia, the Philippines and Singapore. However, some member banks implemented the reforms gradually such as in Sri Lanka, Thailand, Nepal, Korea, Taiwan and Myanmar. The speed with which the interest rates were liberalised was also reflected in the behaviour of interest rates in some countries. In the case of Indonesia, for example, the interest rates moved up sharply right after the interest rates liberalisation of 1983 and this was followed by increases in both the ratio of quasi money and M2 to the gross domestic product. However, in the countries which implemented the reforms gradually, the interest rates generally did not fluctuate very much.

With regard to the transmission mechanism of monetary policy, after the interest rates reforms, almost all member banks relied on the interest rates as the main transmission channel. This is in contrast to the pre-reform era where almost all member countries conducted monetary policy through direct instruments such as credit ceiling or selective credit policy. In terms of monetary policy instruments, in addition to open market operations, all central banks use other instruments, for example, discount facilities, central bank lending, reserve requirement ratio, and moral suasion. In the case of Singapore, to complement its exchange rate policy, the Monetary Authority of Singapore conducts money market operations. The instruments used are mainly foreign exchange swaps and bank loans/borrowings.

The member banks also experienced certain complications and difficulties in managing monetary policy as a consequence of financial reforms. Almost all member banks have problems controlling capital movements after exchange control liberalisation. When the domestic financial market is more attractive, large capital inflows emerge making it difficult to control money. Some countries have also experienced the unsymmetrical movement of interest rates, meaning that lending rates tended to increase as soon as deposit rates increased but not as rapidly lowered when deposit rates decreased. After the financial reforms, it was also found that the relationship between monetary and real variables were changed which has strong implications on the effectiveness of monetary policy.

The empirical part of this study focuses mainly on the investigation of the information content of money with respect to the future movements of price and real income stability as goals of monetary policy. The methodology is based on the recent approach and a new interpretation of the Vector Auto Regression model which has been used by Friedman and Kuttner (1992) and by Hamann (1993). The use of the Vector Auto Regression (VAR) model in this study is unlike Hamann (1993) which covered the periods both before and after financial reforms. The sample period of this study covers only the period after the financial reforms.

The results indicated as reflected in the F-statistics values that M2 is still the “best” intermediate target in the case of the Philippines and M1 in the case of Malaysia and Sri Lanka. Credit has the highest F-statistics followed by M2 in the case of Korea, and M1 in the case of Indonesia. In Indonesia, since credit is no longer controllable after 1983, M1 seems to be the appropiate intermediate target. In Korea, M2 is the ideal intermediate as it is more controllable than credit. On the other hand, since monetary aggregates and interest rates are uncontrollable in the case of Singapore, the exchange rates seem to be the “best” intermediate target.