The information content of the Islamic interbank money market rate in Malaysia

Purpose – The purpose of this paper is to analyze the information content of the Islamic interbank money market rate (IIMMR), with respect to several macroeconomic indicators such as output, inflation, exports, imports, bank loans and stock market index, and compare it against that of the conventional interbank money market rate using the Malaysian data. Design/methodology/approach – The paper relies on the causality tests based on the Toda-Yamamoto method, focusing on the period from January 2000 to December 2006. Findings – The results provide empirical support for the high information content of the IIMMR. Practical implications – A major implication of this study is that the IIMMR can be a reliable variable for monetary policy implementation in the Malaysian case. Originality/value – There have been no studies undertaken in the area of Islamic finance to analyze the information content of the Islamic money market rate to determine its possibility as a monetary policy variable. Alos, the paper enriches the literature by presenting the Malaysian experience in developing its Islamic interbank money market.