Question

Question 2

1. Based on BNM or news report, explain the latest changes in the statutory reserve requirement (SRR) for Malaysia. Your explanation should also include the changes to money supply and the possible impact of the change.

2. Based on your answer above, select an economic problem where that impact would work and explain what could happen.

Answer 1

a.

Statutory Reserve Requirement (SRR)

The Statutory Reserve Requirement (SRR) is an instrument to manage liquidity. Banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate.

The SRR may be raised to manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial stability. Conversely, the Bank may lower the SRR if necessary to support the transmission of monetary policy rates to retail rates. However, it is important to note that changes to SRR should not be construed as a signal on the stance of monetary policy, whereby the OPR is the sole indicator.

b.

economic problem

First, the behavior of the residual AMAR(Average mean adjusted reurn) before and after the announcements tends to be different. The AMAR(Average mean adjusted reurn) seems to hover around the value of zero for most days before the announcement except for day minus nine. This pattern is consistent with the semistrong form market efficiency hypothesis in that the market anticipates changes in the SRR. Based on the significant reaction of the AMAR(Average mean adjusted reurn) , it seems that that the announcement of changes in the SRR is relevant information in the stock market and the stock market reacts to the announcement of changes in the SRR.

Second, the market moves in accordance to changes in SRR. In theory, a decrease in SRR should create a positive reaction in the market whereas a reduction in the SRR should create a negative reaction. The results obtained in the study, support the hypothesis that the theory suggestions. The CMAR (Cummulative mean adjusted retrurn) increases when the announcement pertains to an announcement of a reduction in the SRR and the CMAR decreases when the announcement pertains to an increase in the SRR.

NOTE - please specify word limit