Is Monetary Condition Index an Important Indicator for Malaysia?

This paper estimates the augmented real monetary conditions index (MCI) for Malaysia and evaluates its significance over 1980:1-2004:4 using ARDL cointegration analysis as proposed by Pesaran et al. (2001). The relative strength of the four monetary policy transmission channels, namely the exchange rate, interest rate, asset price and credit channels are studied. Results reveal evidence of long-run cointegration between the real GDP and its determinants (i.e., the exchange rate, short- and long-term interest rate, and claims on private sector), which implies that exchange rate, interest rate and credit channels are three key transmission mechanisms in the conduct of monetary policy in Malaysia, while asset price channel is the least relevant. Sequentially, what seem to drive changes in the real GDP is the credit channel, followed by the exchange rate channel, and interest rate channels, with short rate relatively potency than the long rate at the margin. Results demonstrate that the policy stance that implemented by the Central Bank of Malaysia are corresponding reasonably well with the movement in MCIs. Specifically, MCI confines to the changes of interest rate constructively.