MONETARY POLICY IN ASEAN

Abstract

Before the 1930s, the dominant view of the market system was based upon the belief that a competitive free market is inherently stable, that is, the belief that a free market is capable of achieving stable economic growth and socially desirable goals without government intervention and involvement. A turnabout in this attitude came in 1930s when government first embarked upon active pursuit of macro-economic stabilisation objectives. The two main methods adopted by the government in the bid to attain economic stability are fiscal and monetary policies, both of which have evolved over the years into powerful and effective tools of economic stabilisation. In the ASEAN countries, these two policies, besides their stabilisation function, have been significant in their contribution to the rapid economic growth of these countries as was witnessed in the last few decades. Thus, it would be interesting to inspect the type of policies adopted and the method of their implementation. This academic exercise has chosen to focus on one of the two policies, monetary policy, as both policies cannot be adequately or comprehensively covered in such a short exercise. This academic exercise aims to provide a greater understanding of and to capture the essence of monetary policy as was implemented in the ASEAN countries. It is also a valiant attempt to help fill the gap created by the dearth of literature on this subject. Though perhaps not as wide in scope and depth as a rigorous research paper could be, its coverage of the monetary policy in each ASEAN countries is rather extensive and provides a succint exploration of relevant topics. This academic exercise will start off with a discussion on some basic definitions and the theoretical aspects of monetary policy. A summary of literature reviewed on the monetary policy in each ASEAN country is given in Chapter 3. This is followed by a brief statement of the debate between the Keynesians and Monetarists on the relationship between interest rate and money supply. An empirical analysis was then carried out to test the relationship between interest rate and money in both the Keynesian and Monetarist context. Findings show that the relationship is comparatively more significant in the Monetarist context than in the Keynesian context though the relationship is not significant in all ASEAN countries. This academic exercise is finally wrapped up with a conclusion after a review on its limitations and a presentation of policy implications and recommendations.