Assessing the Effects of Monetary Policy Shocks in Malaysia: A Factor Augmented Vector Autoregressive Approach

: This paper investigates the impact of monetary policy shocks on a wide range of macroeconomic variables in Malaysia. To achieve this, it uses the Factor Augmented Vector Autoregression (FAVAR) approach that combines factor analysis and vector autoregression. The information set consists of 78 monthly time series from 2000:3 to 2010:10. This approach is supposed to provide a more comprehensive and precise forecast of the economy. The results from the impulse response function show that the effect of the price puzzle is reduced with this approach. It is also found that financial and real variables react negatively to the monetary policy shocks in line with the economic theory.