• Chai-Thing Tan Universiti Tunku Abdul Rahman
  • Azali Mohamed Universiti Putra Malaysia
Keywords: Monetary policy rules, Fiscal policy rules, Monetary and fiscal policy interactions


This paper investigates whether monetary policies in Malaysia, Thailand and Singapore are best represented by either the Taylor rule or the augmented Taylor rule. It finds that the augmented Taylor rule, which incorporates the exchange rate and government spending, best represents monetary policies in these countries. The results show that past inflation and the output gap play a role in the monetary policy reaction function in Malaysia and Thailand. The results further show a strong preference towards interest rate smoothing, government spending, and the exchange rate by the central banks.


Download data is not yet available.


Abdel-Haleim, S.M. (2016). Coordination of Monetary and Fiscal Policies: The Case of Egypt. International Review of Research in Emerging Markets and the Global Economy, 2, 933-954.

Agnello, L., & Sousa, R. M. (2011). Can Fiscal Policy Stimulus Boost Economic Recovery?. Revue économique, 62, 1045-1066.

Aklan, N. A., & Nargelecekenler, M. (2008). Taylor Rule in Practice: Evidence from Turkey. International Advances in Economic Research, 14, 156-166.

Alexiou, C. (2009). Government Spending and Economic Growth: Econometric Evidence from the South Eastern Europe (SEE). Journal of Economic and Social Research, 11, 1-16.

Alshahrani, M. S. A., & Alsadiq, M. A. J. (2014). Economic growth and government spending in Saudi Arabia: An empirical investigation. International Monetary Fund.

Ball, L. (1999). Policy Rules for Open Economies. In: Taylor, J. B., Monetary Policy Rules. Chicago: University of Chicago Press, 127-144.

Beju, D. G., & Ciupac-Ulici, M. L. (2015). Taylor Rule in Emerging Countries. Romanian case. Procedia Economics and Finance, 32, 1122-1130.

Brüggemann, I., & Thornton, D. L. (2003). Interest Rate Smoothing and the Specification of the Taylor Rule. Fachbereich Wirtschaftswiss. der Freien Univ.

Caporale, G. M., Helmi, M. H., Çatık, A. N., Ali, F. M., & Akdeniz, C. (2018). Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule? Economic Modelling, 72, 306-319.

Castelnuovo, E. (2003). Taylor Rules, Omitted Variable, and Interest Rate Smoothing in the US. Economic Letters, 81, 55-59.

Cavoli, T., & Rajan, R. S. (2008). Open Economy Inflation Targeting Arrangements and Monetary Policy Rules: Application to India. Indian Growth and Development Review, 1, 237-251.

Chang, H. S. (2005). Estimating the Monetary Policy Reaction Function for Taiwan: A VAR model. The International Journal of Applied Economics, 2, 50-61.

Clarida, R., Gali, J., & Gertler M. (2000). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. The Quarterly Journal of Economics, 65, 147-180.

Clarida, R., Galı, J., & Gertler, M. (1998). Monetary Policy Rules in Practice: Some International Evidence. European Economic Review, 42, 1033-1067.

Croushore, D., & Van Norden, S. (2018). Fiscal Forecasts at the FOMC: Evidence from the Greenbooks. Review of Economics and Statistics, 100, 933-945.

Davig, T., & Leeper, E. M. (2011). Monetary–Fiscal Policy Interactions and Fiscal Stimulus. European Economic Review, 55, 211-227

Edwards, S. (2007). The Relationship Between Exchange Rates and Inflation Targeting Revisited. Central Banking, Analysis, and Economic Policies Book Series, 11, 373-413.

Esanov, A., Merkel, C., & de Souza, L. V. (2017). Monetary Policy Rules for Russia. Journal of Comparative Economics, 33,484-499.

Filosa, R. (2001). Monetary Policy Rules in Some Mature Emerging Economies. BIS pap, 8, 39–68.

Fragetta, M., & Kirsanova, T. (2010). Strategic Monetary and Fiscal Policy Interactions: An Empirical Investigation. European Economic Review, 54, 855-879.

Garcia, C.J., Restrepo, J.E., & Roger, S. (2011). How Much Should Inflation Targeters Care about the Exchange Rate? Journal International. Money Finance, 30, 1590–1617.

Gerdesmeier, D., & Roffia, B. (2004). Empirical Estimates of Reaction Functions for the Euro Area. Swiss Journal of Economics and Statistics, 140, 37-66.

Gerlach, S., & Schnabel, G. (2000). The Taylor Rule and Interest Rates in the EMU area. Economic Letters, 67, 165-171.

Hansen, L. P. (1982). Large Sample Properties of Generalized Method of Moments Estimator, Econometrica, 50, 1029-1054.

Haryono, E., Nugroho, W. A., & Pratomo, W. (2000). Mekanisme Pengendalian Moneter dengan Inflasi Sebagai Sasaran Tunggal. Buletin Ekonomi Moneter dan Perbankan, 2, 68-122.

Hasanov, M., & Omay, T. (2008). Monetary Policy Rules in Practice: Re-Examining the Case of Turkey. Physica A: Statistical Mechanics and its Applications, 387, 4309-4318.

Heller, M. P. S. (2005). Understanding fiscal space. International Monetary Fund.

Hsing, Y. (2004). Estimating the Monetary Policy Reaction Function for Canada: A VAR model. Canadian Business Economics Journal, 3.

Hsing, Y. (2009). Is the Monetary Policy Rule Responsive to Exchange Rate Changes? The Case of Indonesia, Malaysia, the Philippines, and Thailand. International Review of Economics, 56, 123-132.

Hsing, Y., & Lee, S. H. (2004). Estimating the Bank of Korea’s Monetary Policy Reaction Function: New Evidence and Implication. The Journal of the Lorea Economy, 5, 1-16.

Ilzetzki, E., Reinhart, C. M., & Rogoff, K. S. (2017). The Country Chronologies to Exchange Rate Arrangements into the 21st Century: will the anchor currency hold? (No. w23135). National Bureau of Economic Research.

Jondeau, E., & Le Bihan, H. (2002). Evaluating Monetary Policy Rules in Estimated Forward-Looking Models: A Comparison of US And German Monetary Policies. The Econometrics of Policy Evalution, 357-388

Judd, J. P., & Rudebusch, G. D. (1998). Taylor’s Rule and the Fed: 1970-1997. Economic Review-Federal Reserve Bank of San Francisco, 3-16.

Juhro, S. M. (2008). Respon Kebijakan Moneter yang Optimal di Indonesia: The State-Contingent Rule?. Buletin Ekonomi Moneter dan Perbankan, 10, 303-336.

Karim, Z. A., & Karim, B. A. (2014). Interest Rates Targeting of Monetary Policy: An Open Economy SVAR Study of Malaysia. Gadjah Mada International Journal of Business, 16, 1-22.

Kharie, L. (2006). Hubungan Kausal Dinamis Antara Variabel-Variabel Moneter Utama dan Output: Kasus Indonesia di Bawah Sistem Nilai Tukar Mengambang dan Mengambang Terkendali. Bulletin of Monetary Economics and Banking, 9, 1-38.

Kirsanova, T., Leith, C., & Wren‐Lewis, S. (2009). Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments. The Economic Journal, 119, F482-F496.

Kitano, S., & Takaku, K. (2016). External Debt and Taylor Rules in a Small Open Economy. Pacific Economic Review, 21, 541-559.

Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74, 171-190.

Kozicki, S. (1999). How Useful are Taylor Rues for Monetary Policy. Federal Reserve Bank of Kansas City Economic Review, 5-33.

Kumhof, M., Nunes, R., & Yakadina, I.,(2010). Simple Monetary Rules under Fiscal Dominance. Journal of Money, Credit and Banking, 42, 63–92.

Kuttner, K. N. (2002). The Monetary-Fiscal Policy Mix: Perspectives from the US. Bank i Kredyt, (11-12), 207-235.

Lubik, T. A., & Schorfheide, F. (2007). Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation. Journal of Monetary Economics, 54, 1069-1087.

Malik, A. K. (2013). The Effects of Fiscal Spending Shocks on the Performance of Simple Monetary Policy Rules. Economic Modelling, 30, 643-662.

Mishkin, F. S. (2007). The Dangers of Exchange-Rate Pegging in Emerging Market Countries’. Monetary Policy Strategy, 445.

Molodtsova, T., & Papell, D. H. (2009). Out-of-Sample Exchange Rate Predictability with Taylor Rule Fundamentals. Journal of International Economics, 77, 167-180.

Monagaran. L., & Sek, S.K. (2016). Can Taylor Rule Be a Good Representation of Monetary Policy Function for ASEAN5? Indian Journal of Science and technology, 9.

Monetary Authority of Singapore. (2001). Singapore’s Exchange Rate Policy February, 2001.

Moura, M. L. & De Carvalho, A. (2010). What Can Taylor Rules Say About Monetary Policy in Latin America? Journal of Macroeconomics, 32, 392-404.

Osawa, N. (2006). Monetary Policy Responses To The Exchange Rate: Empirical Evidence From Three East Asian Inflation-Targeting Countries. (Bank of Japan, Working Paper 06-E-14). Bank of Japan.

Paez-Farrell. J. (2007). Monetary Policy Rules in Theory and in Practice: Evidence from the UK and the US. Applied Economics, 1-10.

Papadamou, S., Sidiropoulos, M., & Vidra, A. (2018). A Taylor Rule for EU members. Does One Rule Fit to All EU Member Needs? The Journal of Economic Asymmetries, 18, e00104.

Peersman, G., & Smets, F. (1999). The Taylor Rule, A Useful Monetary Policy Benchmark for Euro Area. International Finance, 2, 85-116.

Peiris, S. J., Ding D., Guajardo, J., Klyuev, V., Mona, R., Nyberg, D., Raga, S., Sheridan, N. & Zoli, E.(2016). ASEAN-5 cluster report—evolution of monetary policy frameworks. (No. 16/176). International Monetary Fund Country Report.

Perotti, R. (1999). Fiscal Policy in Good Times and Bad. The Quarterly Journal of Economics, 114, 1399-1436.

Qin, T., & Enders, W. (2008). In-Sample and Out-of-Sample Properties of Linear and Nonlinear Taylor Rules. Journal of Macroeconomics, 30, 428-443.

Ramayandi, A. (2007). Approximating Monetary Policy: Case Study for the ASEAN-5 (No. 200707). Department of Economics, Padjadjaran University.

Rudebusch, G. D. (2002). Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia. Journal of monetary economics, 49, 1161-1187.

Saghir, G. & Malik, W.S. (2017). Estimating Monetary Policy Reaction Function of State Bank Of Pakistan. Pakistan Economic and Social Review, 55, 119-157

Said, F. F., & Ismail, A. G. (2008). Monetary Policy, Capital Requirement and Lending Behaviour of Islamic Banking in Malaysia. Journal of Economic Cooperation Among Islamic Countries, 29,1-22.

Sánchez-Fung, J. R. (2005). Estimating a Monetary Policy Reaction Function for the Dominican Republic. International Economic Journal, 19, 563-577.

Sargent, T. J., & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5, 1-17.

Sek, S. K. (2009). Interactions between Monetary Policy and Exchange Rate in Inflation Targeting Emerging Countries: The Case Of Three East Asian Countries. International Journal of Economics and Finance, 1, 27-44.

Senay, O. (2008). Interest Rate Rules and Welfare in Open Economies. Scottish Journal of Political Economy, 55, 300-329.

Seyfried, W. L., & Bremmer, D. S. (2001). Analyzing Fed behavior Using a Dynamic Taylor Type Rule. Journal of Economics and Finance, 25, 23-32.

Sims, C. A. (2011). Stepping on a Rake: The Role of Fiscal Policy in the Inflation of the 1970s. European Economic Review, 55, 48-56.

Svensson, L. E. O. (1999). Inflation Targeting: Some Extensions, Scandinavian Journal of Economics, 101, 337-361.

Svensson, L. E. O. (2000). Open-Economy Inflation Targeting, Journal of International Economics, 50, 155-184.

Tan, C. T., Mohamed, A., Habibullah, M. S., & Chin, L. (2020). The Impacts of Monetary and Fiscal Policies on Economic Growth in Malaysia, Singapore and Thailand. South Asian Journal of Macroeconomics and Public Finance, 9, 114-130.

Tanzi, V., & Schuknecht, L. (2003). Public Finances and Economic Growth in European Countries. Fostering Economic Growth in Europe, 178-196.

Taylor, J. B. (1993). Discretion Versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy. 39,195-214

Taylor, J. B. (2001). The Role of the Exchange Rate in Monetary-Policy Rules. American Economic Review Papers and Proceedings, 91,263-267.

Umezaki, S. (2007). Monetary Policy in a Small Open Economy: The Case of Malaysia. The Developing Economies, 45, 437-464.

Woodford, M. (2001). Fiscal Requirements for Price Stability. Journal of Money, Credit and Banking, 33, 669–728.

Yazgan, M. E., & Yilmazkuday, H. (2007). Monetary Policy Rules in Practice: Evidence from Turkey and Israel. Applied Financial Economics, 17, 1-8.

Zoli, E. (2005). How Does Fiscal Policy Affect Monetary Policy in Emerging Market Countries? (No. 174). Bank for International Settlements.

How to Cite
Tan, C.-T., & Mohamed, A. (2020). MONETARY POLICY RULES IN MALAYSIA, SINGAPORE AND THAILAND. Buletin Ekonomi Moneter Dan Perbankan, 23(4), 565 - 596.