Assessing the impact of regulatory implementation since joining the European Union : analysing Fisher’s equation of exchange for Malta

Abstract

The Great Recession (2007-2009) and Sovereign Debt Crisis (2010-2012) put the euro area to the test, and the subsequent recovery measures exposed the economic divides between members. The dissertation sought to determine the impact of the evolving financial regulations on Maltese core inflation. Together with non-standard policy measures, these elements were the key approaches to tackle the causes and effects of the recession. Malta provided an interesting context for study as it was not significantly affected by recession, yet adopted the regulatory changes put in place. Hence, this allowed for greater focus on the regulatory element which is less prominent in economic literature. The dissertation estimated an error correction model using data for the period 2004-2019. The model was based on the theoretical framework of Fisher’s Equation of Exchange, whilst allowing for further variables such as uncertainty, financial development, regulatory implementation, and enforcement actions. The model indicated that, given Malta’s demand-led model for economic growth, the non-standard monetary policies implemented after the crises would have had modest benefits over the long-term in terms of core inflation growth, whilst regulatory enforcement was determined to have a deflationary impact over time. This showed that Maltese credit and financial institutions considered the conduct of regulatory authorities and adjusted their behaviour, thus impacting the monetary policy transition mechanism.