THE ROLE OF CREDIT SUPPLY CHANNEL IN TRANSMISSION OF MONETARY POLICY: AN EMPIRICAL INVESTIGATION OF MALAYSIAN BANKS ON BASIS OF SIZE AND LIQUIDITY

The transmission channels of monetary policy represent the path to affect the macroeconomic objectives of policy. After recent crisis, the transmission mechanism has recently received increased attention, especially with respect to the efficiency of banks' credit supply channel. Yet, we know less about the relative role of banks' credit supply channel in monetary policy transmission mechanism. This study therefore examines the impact of monetary policy on the credit supply of banks using an unbalanced panel dataset over the period 2005-2016 for Malaysia. To mitigate the problem of endogeneity, the robust two-step system-generalize method of moments (GMM) estimator is applied. While estimating three alternative measures of monetary policy on banks' credit supply, several bank-specific and macroeconomic variables are included in the specification as control variables. In baseline model, we provide strong evidence on the existence of credit supply cannel of monetary policy in Malaysia. Further, the baseline models are extended on basis of size and liquidity to investigate the same phenomena. The results from the extended model indicate that the small-sized banks and the less-liquid banks respond more as compared to the large sized banks and the more-liquid banks, respectively in Malaysia. The relatively less response of large-sized banks and the more-liquid banks to monetary policy may make it difficult for the central bank to achieve the desired objectives of the monetary policy. Our findings suggest that the nature of large-sized banks and the more-liquid banks while devising the monetary policy instruments to manage credit supply in the economy. Further, the results imply that the central bank needs to revisit the monetary policy transmission through credit supply channel for the small-sized banks and the less-liquid banks, especially in economies with emerging banking system. Otherwise, there will appear adverse impact of monetary policy nullifying the objectives of policy.