A Comparative study on the impacts of the US monetary shocks on macroeconomic fluctuations under flexible and fixed exchange rate regimes : Malaysia versus Hong Kong
Since the initiation of quantitative easing (QE) measures in the US in 2008, the Federal Reserve has followed up with a QE tapering in 2013 and a policy normalization measure in 2015 where the US finally raised its interest rate for the first time in nearly a decade. Such monetary operations in the...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2018
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| Subjects: | |
| Online Access: | https://eprints.ums.edu.my/id/eprint/38515/1/ABSTRACT.pdf https://eprints.ums.edu.my/id/eprint/38515/2/FULLTEXT.pdf |
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| Summary: | Since the initiation of quantitative easing (QE) measures in the US in 2008, the Federal Reserve has followed up with a QE tapering in 2013 and a policy normalization measure in 2015 where the US finally raised its interest rate for the first time in nearly a decade. Such monetary operations in the US might have impacted the Malaysian market in the form of external shocks. This thesis aims to examine the effects of U.S. monetary policy expectations on macroeconomic fluctuations on Malaysia, a small and open economy. This thesis estimates a structural VAR model using monthly data from January 2000 to February 2016 with Friedman's hypothesis as a guiding principle. The result suggests that the Malaysian ringgit and industrial production were mostly affected by the U.S financial market variables. In comparison, Malaysia's inflation rate was relatively less affected by this external shock as compared to oil price shocks. This shows that the Malaysian ringgit serves as the primary absorber of the external shocks. Given that Malaysia operates under a flexible exchange rate regime, the nominal exchange rate acts as a natural automatic stabilizer when the economy faces external disturbances. Besides, based on previous studies regarding the choice of exchange rate regimes in absorbing external shocks, the results were found to be mixed. Therefore, this thesis also aims to examine the effectiveness and the role of flexible exchange rate regime against external shocks based on Friedman's hypothesis, after determining the impact of external shocks towards macroeconomic fluctuations in Malaysia. In order to show the differences between the bipolar choices of the exchange rate regime, this study will consider data from Hong Kong. With the two markets occupying either end of the spectrum, the contrast should be clearer and the conclusions more clear-cut. Consistent with prior results, the result indicates that interest rates in Hong Kong are more reactionary to U.S. monetary shocks compared to Malaysia. In general, the evidence is consistent with Friedman's hypothesis. |
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