Identifying and testing the transmission mechanism of monetary policy (United States, Malaysia)

There is continuing debate on the issues of transmission channels of monetary policy. Taylor (1995) classified different theories of the transmission mechanism into two, the money and credit channels. To date, the results from studies investigating the importance of these channels have been mixed. This dissertation contributes to the debate by introducing advanced techniques in time-series economics to examine the relative importance of the money and credit channels of transmission mechanism of monetary policy in the United States and Malaysia.; A key contribution of this dissertation is to utilize the identification scheme introduced by Canova and De Nicolo (2002) to identify monetary policy shocks in order to test the relative importance of the transmission channels. This method first involves extracting orthogonal innovations from the reduced-form model. Second, it employs the signs of the theoretical co-movements of selected variables in response to an orthogonal innovation based on theory in order to study the information content of and assign a structural interpretation to the disturbances. The test of the relative importance of channels is carried out by comparing the responses of output with respect to a monetary shock of a fully specified model (the benchmark model) to one that shuts down the impact of a channel (the constrained model). This dissertation also provides a method for measuring the difference between the benchmark and constrained impulse response functions and hence quantifying the marginal importance of each channel.; The results for the study of the United States show that the overall nature of the transmission process has changed over the last four decades. While the role of the money channel has been somewhat consistent, there are significant changes in the role of the credit channel. The credit channel has an important role in transmitting monetary policy impulses in the 1960s and 1970s, but its role lessened markedly in the recent two decades. In contrast, the study of Malaysia finds that the credit channel plays a more significant role than the money channel over the recent two decades.