Taylor rule – the _

[2710] Malaysia’s Taylor rule and the OPR

Bank Negara held the Overnight Policy Rate at 3.00% yesterday, as widely expected. I tried to explain it fully at Asean Confidential (Sorry, you have to pay for that. I gotta pay for my nasi goreng).

But what if the OPR had purely tracked the Taylor rule?

Taylors rule versus OPR

The drop is due to slower GDP growth and low inflation. I expect both to accelerate later in the year and so, you can see the Taylors rule rate creeping up.

I do not expect the Bank Negara to follow this particular Taylor rule of mine because there are some deficiencies with it. The rule at the moment uses full GDP growth and headline inflation. I want to fine-tune it by replacing the two factors with domestic demand and core inflation respectively instead but… I have been too lazy to do that.

But in any case, for first-pass rough analysis, I think this particular model does help in an actual crisis. Drastic Taylor rule rate movement leading to stabilization at some rate did precede OPR movement.

[2496] Taylor’s OPR (more proof we did not need that stimulus)

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).