UPSI Digital Repository (UDRep)
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Abstract : Universiti Pendidikan Sultan Idris |
The general objective of this study is to examine the monetary policy reaction function
with the presence of exchange rate and terms of trade (TOT) in an economic uncertainty.
The specific objectives of this study are to examine the causal relationship between
monetary policy and economic uncertainty variables; and to examine the cointegration
relationship between monetary policy by including the external economic uncertainty
variables without neglecting the output uncertainty and inflation uncertainty. The data
of this study are collected on a quarterly basis from the year 1995 quarter one until the
year 2018 quarter one based on a sample of 30 countries. This study employs the
causality tests (i.e., Toda Yamamoto causality test and Granger causality test) and panel
heterogeneous cointegration approach. The findings from the causality tests and panel
heterogeneous cointegration approach shows that the economic uncertainty variables
have a causal relationship with monetary policy, and there is a significant long-run and
short-run relationship between monetary policy and economic uncertainty variables,
respectively. Overall, this study shows that the monetary policymakers are able to
optimise the functions of the external economic uncertainty variables in the monetary
policy reaction function without ignoring the role of the output uncertainty and inflation
uncertainty. The policy implications of this study are monetary policymakers are able
to design an alternative economic policy; to combat the economic uncertainty via
interest rate uncertainty; to mitigate the negative impact from economic uncertainty;
and to design a better economic policy for open economies to achieve the monetary
policy goals. |
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