Since the Monetary Policy Committee will be meeting next week, it is only natural to talk about the Overnight Policy Rate. It currently stands at 3.00% and it is likely to stay like that after the MPC meet. I personally (and professionally!) am betting a cut only in March as I think while inflationary pressure is receding, it is still high. Maybe, there is a bias in that expectation. What can I say?

But what would a customized Taylor’s rule say?

This particular Taylor’s rule is imperfect as the “equilibria” are somewhat squishy and not quite as methodical as I would like it to be, but in the coming weeks I should be able to calculate better coefficients to produce better hypothetical rate to compare with the actual OPR.

But observing the preliminary customized Taylor’s rule of mine, the OPR does seem to lag behind the rule. When I met some officials and economists from the Malaysian central bank a month or two back, they cheekily said they would not reveal the “natural rates”. The next time I meet them, I plan to cheekily share with them my Taylor’s rule, and say “you don’t have to tell me because I can read your mind.”

What I find interesting is that during the last recession, the Taylor’s rule suggests that Malaysia would have been in some kind of liquidity trap if the OPR had followed the rule closely. More interestingly, since the monetary policy was tight during that time, it could have been loosened more, leaving little if any need for  the 2008/2009 fiscal stimulus. Yet another proof against the Najib administration’s fiscal stimulus (or non-stimulus as Mr. Hisham, I would imagine, would put it).

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