Capital Market Development and Financial Deregulation in
Thailand and Malaysia: Implications for Financial Structure and the
Monetary Transmission Mechanism
Tim Callen and Patricia Reynolds

 

Capital market development and financial deregulation in Thailand and Malaysia are opening up new financing opportunities for domestic firms and households. This paper looks at the impact of these developments on the financing of economic activity in Thailand and Malaysia over the period 1980-95, and the implications for the conduct of monetary policy.

The paper finds that rapid investment and growth have been associated with a shift in corporate financing from internally generated to externally generated funds. In Thailand, these have been raised mainly through financial institutions; in Malaysia, use of capital markets has expanded. In both countries, corporate leverage ratios have risen; the paper finds evidence that this--together with financial liberalization--has increased the efficiency of interest rate policy.

Looking to the future, developments in corporate leverage ratios, the growth of domestic bond markets, and changes in the composition of bank loan portfolios, as well as continued financial liberalization, will all have important effects on monetary policy implementation. The paper underlines the need for close monitoring of these trends and their implications to facilitate effective monetary management in the future.


Tim Callen is an economist in the Southeast Asia and Pacific Department of the IMF. Prior to joining the Fund, Mr. Callen held positions with the Bank of England, the Reserve Bank of Australia, and Hambros Bank.

Patricia Reynolds is an economist in the Southeast Asia and Pacific Department of the IMF. Before joining the Fund, she was an Assistant Professor at the University of Southern California.

 

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