• Ascarya . Center for Central Banking Research and Education, Bank Indonesia, Jl. MH. Thamrin No. 2, Sjafruddin Prawiranegara Tower, 20th Floor, Jakarta 10350, Indonesia.


This study aims to identify and determine conventional and Islamic monetary policies transmission mechanisms through interest or profit channel, in transmitting the monetary policy into real economy and prices, using Error Correction Model (ECM), Auto Regressive Distributive Lag (ARDL), and Vector Error Correction Model (VECM). Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) results suggest that conventional interest based financial system tends to increase inflation and decrease economic growth, while Islamic interest-free financial system tends not to induce inflation and not to hinder economic growth. Estimation results of ECM, ARDL and VECM show that under dual financial system, the increase of SBI tends to increase inflation and tends to decrease economic growth, while the increase of SBIS gives insignificant impact to inflation and economic growth. SBIS mostly still gives unsatisfactorily results since it is based on juÑÉlah and benchmarked to SBI. So that SBIS should be improved using PLS mode of finance. Moreover, the adoption of ITF since July 2005 has consistently increased inflation, so that it needs to be reconsidered. In addition, low and stable inflation and accelerated economic growth under dual financial system could be achieved by increasing the share of Islamic finance, especially Islamic banking in Indonesian dual financial system. The study of monetary policy transmission mechanism under dual financial system is very scarce, so that this study will provide valuable information to monetary authority which implements dual financial system, such as Malaysia, Pakistan, Indonesia and most other OIC countries.


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How to Cite

., A. (2014). MONETARY POLICY TRANSMISSION MECHANISM UNDER DUAL FINANCIAL SYSTEM IN INDONESIA: INTEREST-PROFIT CHANNEL. International Journal of Economics, Management and Accounting, 22(1). Retrieved from