A Monetary Policy Rule: The Augmented Monetary Conditions Index: On the Asean-Five
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Previous studies suggested Monetary Conditions Index (hereafter MCI) serves as an indicator of the monetary policy stance to capture the degree of tightness of the monetary policy. The weights of the MCI in the model reflect long-term effects of the interest rate and the exchange rate on the economic activity. Nevertheless, MCIs may not be used as an operational target as it is not resilient to shock identification. Recognizing the caveats upon its usage empirically, the augmented MCI (AMCI) is contemplated by incorporating other informative variables into the conventional model. Since monetary policy affects the price level through a number of transmission mechanisms, other variables need to be incorporated to AMCI to account for possible channels in the transmission mechanisms. First, the weight of the AMCI is estimated, and the lag effect on the real GDP is identified using Autoregression Distribution Lags (ARDL) approach. Bounds test reveals evidence of cointegration for ASEAN-Five countries. Results reveal that AMCI tracks the inverse movements of the real GDP plausibly well on average, except during the onset of 1997/98 Asian Financial Crisis.