The article is discussing of bank deposits and loans in the monetary transmission mechanism. It would lead the financial system to achieve monetary stability and creation of sound financial structure.
The monetary policy implemented by bank can influence the real economy through monetary transmission mechanism such as money channel and credit channel. For example, in the short run, bank may sell off their securities holdings to deal with liquidity problem while loan in economy still remained the same. However, loan termination and halt to new loan supply may implement by bank due to contractionary monetary policy in the long run which lead to decline in the aggregate economic output.
The test carried out using auto-regressive distributed lag (ADRL) model discuss the long-run relationship between monetary policy variable and bank balance sheet items, the interaction between bank loan and deposit with the monetary policy indicator. The result indicated that monetary policy shock is transmitted through bank deposits, the money view instead of bank loan, and the credit view. However, inflation and real exchange rate do influence deposit in the long run.
The other test result, Impulse Response Functions (IRF) analyses the effect of interest rate shocks on future value of variables, the balance sheet item. The bank deposit responses significantly to changes in interest rate in the short run but not bank loan. For the Variance Decomposition Analysis (VDA) test, showing the fraction of forecast error variance of variable attributed to shocks in other variable, bank loan played a role in triggering the right monetary policy action.
In conclusion, a healthy and stable banking system which involve money and lending channel for monetary transmission in economy enable effective implementation of monetary policy and it is a pre-condition of ensuring overall economic stability.
In early 1980, Malaysia undergoes valid progression and development in international economic and financial environment. This has posed extraordinary challenge to Bank Negara Malaysia in conducting the monetary policy operation with the liberalization of interest rates and deregulation of bank loan rates and bank deposit rates on the prevailing market. As a result, this prompted a more market-oriented interest rate determination process. In return, the market has turned into a more interest rate sensitive market (bank credit and capital market) from the interest-inelastic market (government securities market).
In the context of monetary policy, it can often be seen that central banks in many countries utilize raising interest rate proactively as a strategy to prevent rising of inflation in each nation’s economy. According to Hannan and Berger (1992), and Weth (2002), bank tends to adjust deposit rate more quickly than lending rate when interest rate are falling and vice versa. First of all, interest rate channel in monetary transmission mechanism which involves real long-term...