Purpose – The purpose of this paper is to analyze the information content of the Islamic interbank money market rate (IIMMR), with respect to several macroeconomic indicators such as output, inflation, exports, imports, bank loans and stock market index, and compare it against that of the conventional interbank money market rate using the Malaysian data.
Design/methodology/approach – The paper relies on the causality tests based on the Toda-Yamamoto method, focusing on the period from January 2000 to December 2006.
Findings – The results provide empirical support for the high information content of the IIMMR.
Practical implications – A major implication of this study is that the IIMMR can be a reliable variable for monetary policy implementation in the Malaysian case.
Originality/value – There have been no studies undertaken in the area of Islamic finance to analyze the information content of the Islamic money market rate to determine its possibility as a monetary policy variable. Alos, the paper enriches the literature by presenting the Malaysian experience in developing its Islamic interbank money market. Article Type:
Islam; Monetary policy; Money markets; Banking; Malaysia.
International Journal of Islamic and Middle Eastern Finance and Management Volume:
Emerald Group Publishing Limited
The information content provided by financial variables is highly valuable, particularly to policymakers. Variables with high information content about the economy could function as the relevant policy indicators or trigger variables in the implementation of macroeconomic policies. In the case of monetary policy, often, monetary aggregates or interest rates are considered as relevant trigger variables used to influence the intended macroeconomic variables. Implementation of monetary policy through the policy indicator that has the most information content about the economy ensures effective and timely policy implementation, thus successful achievement of the policy objectives.
The choice of the financial variables as the “best policy indicator” would largely depend on how well the indicator could predict movements and directions of the macroeconomic variables. Furthermore, with the continuously changing financial landscape, the relevance of a particular variable as the policy indicator could also be changing. In this regard, it is a challenge for the policymakers to ensure that the policy indicator that they are adopting continues to remain relevant in line with the dynamic nature of the financial sector.
In this study, we examine the possibility of the Islamic interbank money market rate (IIMMR) as the policy indicator by assessing its information content about the Malaysian economy. What motivates us to undertake this analysis is that while the Islamic financial market has been rapidly developing in the Malaysian economy for quite some time now, there is no study being undertaken to determine the relevance of the Islamic monetary instrument in the policymaking process of the country. In particular, the Malaysian Islamic money market has been established since January 1994 with the main objective to facilitate fundings for Islamic banks and Islamic banking windows in the country. After 14 years since its establishment, the Islamic money market has experienced rapid growth, in tandem with the vibrant and progressive Islamic financial sector in the country. This is well-reflected by the large amount of funds channeled by the Islamic money market, which range from RM30 billion to RM40 billion monthly. Reflecting the commitment to turn the country into a global Islamic banking and finance hub, the Malaysian central bank – Bank Negara Malaysia (BNM) – continues to remain supportive of the development of the Islamic financial markets. In this regard, BNM continues...