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Impact of financial market developments on the monetary transmission mechanism

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Disciplines
  • Economics

Abstract

Impact of financial market developments on the monetary transmission mechanism, April 2008 BIS Papers No 39 49 Impact of financial market developments on the monetary transmission mechanism1 Sukudhew Singh, Ahmad Razi, Norhana Endut and Helmi Ramlee2 1. Introduction The objective of this paper is to determine how the monetary transmission mechanism is affected by financial market developments. The study is motivated by the fact that the Malaysian financial system has undergone tremendous change in the last decade and that the pace of change is only likely to accelerate in the coming decade. Given that monetary policy works through its influence on prices in the financial system, some of these changes could have important implications for the way monetary policy changes are transmitted through the financial system. These changes could have important implications for the effectiveness of monetary policy. We adopt two approaches in this paper. The first is to trawl the relevant literature and attempt to summarise the key findings regarding the implications of financial developments for monetary policy. Many of these studies are done for the financially developed countries, but by looking at their findings, we can gain important insights into the consequences of both changes that are already occurring in our financial systems, and those that are likely to occur in the future. The second approach used is an empirical study of how some types of financial developments could potentially influence the way in which changes in the policy rate are transmitted to various types of market interest rates. The paper is organised in three parts. In the next section, we summarise the role of financial markets in the monetary transmission mechanism. In Section 3, we present the key findings from our survey of the literature. Section 4 describes the empirical study and its main findings, and we conclude with some thoughts on what is known about the impact of financial

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