Bank liquidity, money supply and interest rates: does monetary policy matter? / Ahmad Radhi Md Ali

Since 1989, Bank Negara Malaysia, the Central Bank of the country has faced a number of challenges in implementing the monetary policy. Liquidity assets have been increasing in the banking system from early 1989, emerging from several sources.At the same time , demand for loans did not growing at the same rate. This results in excess liquidity will put put pressures on the inflation rate. During the period 1989 to 1993, this has been the main barrier to Central Bank in achieving its ultimate goals of monetary policy. Money supply (M3) and interest rates have been chosen by Bank Negara Malaysia as the intermediate targets in controlling excess liquidity to curb inflationary pressures. The research of the project paper is to study the sensitivity of those variables to the monetary policy instruments regulated by Bank Negara. From the research done, interest rates has been found to be the most sensitive indicator compared to the money supply. Therefore, the detailed informations in this project paper will give a clear picture of the actual situation.