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

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

Name dc:type.qualificationname

Ph.D.

Level dc:type.qualificationlevel

doctoral

Grantor dc:publisher.institution

University of Southampton

Year dc:date.issued

2011

Author dc:creator

• Abdul Karim, Zulkefly

Advisors dc:contributor.advisor

• Smith, Peter
• Bluedorn, John C.