Measuring the Effects of Malaysian Monetary Policy: VARMA vs VAR Models

In this paper, we take a step forward from the existing monetary literature, which is largely dominated by vector autoregressive (VAR) and structural vector autoregressive (SVAR) models, and apply a vector autoregressive moving average (VARMA) methodology for modelling and analysing Malaysian monetary policy. The Malaysian economy is an interesting case study of a small open economy with capital control measures imposed by the government following the 1997 Asian financial crisis. We compare the impulse responses generated by VARMA models with those generated by VARs and SVARs for the preand postcrisis periods. We find that the VARMA impulse responses are more consistent with prior theoretical expectations under the different exchange rate regimes experienced by Malaysia.