Bank lending and monetary policy: the effects of structural shift in interest rates

This paper provides evidence to show that the interest rate regime adopted by the monetary authority plays an important role in determining the effectiveness of the transmission mechanism of monetary policy via bank lending channel using Malaysian data. As part of the strategy to deal with the recent financial crisis, the Malaysian government introduced capital control measures which subsequently led to a structural shift in interest rates. Before the shift, interest rates were relatively high. The contractionary monetary policy achieved desirable results through the bank lending channel. However, responses of bank lending to interest rate changes were limited after the structural shift which characterises a period of low interest rate regime, rendering the bank lending channel ineffective. We are grateful to an anonymous referee and Eric Girardin, the Associate Editor, for helpful comments and suggestions that led to improvement of this paper. Any remaining errors are our own responsibility