Essays on monetary policy : macro and firm-level evidence from Malaysia, a small open economy

摘要

This dissertation is comprised of three empirical essays evaluating the effectiveness of monetary policy implementation in a small open economy (i.e. Malaysia) by using macro, and micro-level study. The motivations for these three studies evolve around the issue of the role of monetary policy in transmitting to economic activity at the macroeconomic level, and at the microeconomic level through firm-level equity returns, and firm-level investment spending. The first essay, which is in Chapter 2, examines the implementation of monetary policy in a small open economy at the macroeconomic level by using an open-economy structural VAR (SVAR) study. Monetary policy variables (interest rate and money supply) have been measured through a non-recursive identification scheme, which allows the monetary authority to set the interest rate and money supply after observing the current value of foreign variables, domestic output and inflation. Specifically, this chapter tests the effect of foreign shocks upon domestic macroeconomic fluctuations and monetary policy, and examines the effectiveness of domestic monetary policy as a stabilization policy. The results show the important role of foreign shocks in influencing Malaysian monetary policy and macroeconomic variables. There is a real effect of monetary policy, which is that a positive shock in money supply increases domestic output. In contrast, a positive interest rates shock has a negative effect on domestic output growth and inflation. The effects of money supply and interest rate shocks on the exchange rate and stock prices are also consistent with standard economic theory. In addition, domestic monetary policy enables to mitigate the negative effect of external shocks upon domestic economy. iii The second essay (chapter 3) investigates the effects of domestic monetary policy shocks upon Malaysian firm-level equity returns in a dynamic panel data framework. A domestic monetary policy shock is generated via a recursive SVAR identification scheme, which allows the monetary authority to set the overnight interbank rate after observing the current value of world oil price, foreign income, foreign monetary policy, domestic output and inflation. An augmented Fama and French (1992, 1996) multifactor model has been used in estimating the determinants of firm-level stock returns. The results revealed that firm stock returns have responded negatively to monetary policy shocks. Moreover, the effect of domestic monetary policy shocks on stock returns is significant for small firms’ equity, whereas equity of large firms is not significantly affected. The effect of domestic monetary policy also has differential effects according to the sub-sector of the economy in which a firm operates. The equity returns of financially constrained firms are also significantly more affected by domestic monetary policy than the returns of less constrained firms. The third essay, which is in Chapter 4, examines the effects of monetary policy on firms’ balance sheets, with a particular focus on the effects upon firms’ fixedinvestment spending. The focal point concerns the two main channels of monetary policy transmission mechanism, namely the interest rate and broad credit channels in affecting firms’ investment spending. Specifically, the interest rates channel is measured through the firm user cost of capital, whereas the broad credit channel is identified through the firms’ liquidity (cash flow to capital stock ratio). By estimating the firms’ investment model using a dynamic neoclassical framework in an autoregressive distributed lagged (ARDL) model, the empirical results tend to support the relevance of interest rates, and the broad credit channel in transmitting to the firm-level investment spending. The results also reveal that the effect of monetary policy channels to the firms’ investment are heterogeneous, in that the small firms who faced financial constraint responded more to monetary tightening as compared to the large firms (less constrained firms). The effect of monetary policy is also heterogeneous across subsectors of the economy, as some sectors (for example, consumer products, industrial products and services) are significantly affected by monetary policy, whereas other subsectors (for example, property) are not affected