Taylor Rule-based Monetary Policy for Developing Economies- A Case Study with Malaysia

This paper investigates whether Taylor rule can better guide the monetary policy in developing economies. Existing literatures do not focus on the implementability of rule-based monetary policy in emerging economies. In last two decades a number of industrialised countries have gained success in achieving macroeconomic policy goals by switching to rule-based policy regime from discretionary framework but emerging economies, in this regard, could not make much progress. As a case study, the paper examines whether macroeconomic performance of Malaysia could be improved through the implementation of Taylor rule as a monetary policy. Counterfactual historical simulation confirms that Taylor rule-based monetary policy improves overall performance of Malaysian economy through lowering output variability by a considerable amount. Findings of this study yield some incentives to propose rule-based monetary policy for developing economies.