ALTERNATIVE OF MONETARY POLICY INDICATOR: PANEL DATA ANALYSIS FROM ISLAMIC BANKS IN MALAYSIA

The monetary policy indicators such as monetary aggregates, interest rates andMonetary Condition Index (MCI) are the traditional monetary policy indicatorsused in order to obtain early indication of the impact of monetary policy. Theseindicators could function as appropriate monetary policy indicators that will provideinformation to the monetary policy makers. The development in Islamic financialsystem however creates a challenge to find a monetary policy indicator, which is inconformity with Islamic teaching. Therefore, this paper is aimed to examine the futuregrowth of nominal GDP as an alternative variable for monetary policy indicator inIslamic monetary system. The investigation will benefit from data of 17 Islamic banksin Malaysia which implement full fledge or Islamic windows scheme spanning from2005 to 2010. GMM system method is used to analyze the data in hope to validatethe appropriateness of the alternative monetary policy indicator. The result suggeststhat the future growth of nominal GDP is significant as monetary policy indicator andcould be applied by the central bank in implementing the monetary policy especiallyin the dual banking system.Keywords: Monetary Policy; Monetary Policy Indicators; Bank Financing.JEL Classification: E52; E58; C33; G21.