MONETARY POLICY TRANSMISSION MECHANISM UNDER DUAL FINANCIAL SYSTEM IN INDONESIA: INTEREST-PROFIT CHANNEL

Authors

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

Abstract

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.

References

‘Ayuniyyah, Q., N.A. Achsani, and Ascarya. “Pengaruh Instrumen
Moneter Syariah dan Konvensional.” Iqtishodia - Jurnal Ekonomi Islam Republika, August 26, 2010: 6.

Angeloni, I., A.K. Kashyap, B. Mojon, and D. Terlizzese. “Monetary
Transmission in the Euro Area: Does the Interest Rate Channel
Explain All?” NBER Working Paper, no. 9984 (2003): 2-41.

Ascarya. “Lessons Learned from Repeated Financial Crises: An
Islamic Economic Perspective.” Buletin Ekonomi Moneter dan
Perbankan 12, no. 1 (2009): 33-82.

Ascarya.“Transmission Channel and the Efficacy of Dual Monetary
Policy in Indonesia.” Bank Indonesia Working Paper, no.
WP/10/03 (2010): 1-54.

Astiyah, S. “Pemetaan dan Peran Relatif Jalur Transmisi Kebijakan
Moneter Paksa Krisis: 2000:01-2005:03.” Bank Indonesia
Working Paper (2005).

_______, W.A. Nugroho, and D.F. Anugerah. “Kebijakan Moneter
Terpadu dalam Dual Banking System.” Bank Indonesia Working
Paper, no. 9 (2006).

Bernanke, B.S., and M. Gertler. “Inside the Black Box: The Credit
Channel of Monetary Policy Transmission.” NBER Working
Paper, no. 5146 (1995): 1-38.

Boivin, J., M.P. Giannoni, and B. Mojon. “How Has the Euro
Changed the Monetary Transmission?” NBER Working Paper,
no. 14190 (2010): 1-71.

Bonga-Bonga, L. “Monetary Policy and Long-Term Interest Rates in
South Africa.” International Business & Economics Research
Journal 9, no. 10 (2010): 43-54.

Caporale, T., and B. McKiernan. “Monetary Policy Shocks and
Interest Rates: Further Evidence on the Liquidity Effect.”
Weltwirtschaftluches Archiv 135, no. 2 (1999): 306-16.

Chapra, Muhammad U. Towards a Just Monetary System. Leicester:
The Islamic Foundation, 1985.

Chatelain, J.B., M. Ehrmann, A. Generale, J. Martinez-Pages, P.
Vermeulen, and A. Worms. “Monetary Policy Transmission in
the Euro Area – Evidence from Micro Data on Firms and
Banks.” Journal of the European Economic Association 1, no. 2-
3 (2003): 731-42.

Choudhury, M.A. Money in Islam: A Study in Islamic Political
Economy. London: Routledge, 1997.

Dewati, W., N. Suryaningsih, and T. Chawwa. “Revisiting Transmisi
Kebijakan Moneter di Indonesia: Bukti Empiris dengan
Pendekatan VAR dan Panel Data.” Bank Indonesia Working
Paper 19 (2009).

Ireland, P.N. “The Monetary Transmission Mechanism.” In The New
Palgrave Dictionary of Economics, 2nd Edition, edited by
Lawrence Blume and Steven Durlauf. Hampshire: Palgrave
Macmillan, 2008.

Iwata, S. “Monetary Policy and the Term Structure of Interest Rates
When Short-Term Rates are Close to Zero.” Bank of Japan
(Monetary and Economic Studies), November (2010).

Karim, A.A. Ekonomi Makro Islami. Jakarta: Rajawali Pers, 2007.
Kobayashi, T. “Incomplete Interest Rate Pass-Through and Optimal
Monetary Policy.” International Journal of Central Banking 4,
no. 3 (2008): 77-118.

Kusmiarso, B., E. Sukawati, S. Pambudi, D. Angkoro, A. Prasmuko,
and I.S. Hafidz. “Interest Rate Channel of Monetary
Transmission in Indonesia.” In Transmission Mechanisms of
Monetary Policy in Indonesia, edited by Perry Warjiyo and Juda
Agung. Jakarta: Bank Indonesia, 2002.

Kuttner, K.N., and P.C. Mosser. “The Monetary Transmission
Mechanism: Some Answers and Further Questions.” Federal
Reserve Bank New York (Economic Policy Review), May (2002).

Loayza, N., and K. Schmidt-Hebbel. “Monetary Policy Functions
and Transmission Mechanisms: An Overview.” Central Bank of
Chile, (2002).

Mishkin, F.S. “Symposium on the Monetary Transmission
Mechanic.” The Journal of Economic Perspectives 9, no. 4
(1995): 3-10.

Mishkin, F.S. The Economics of Money, Banking and Financial
Markets. New York: Columbia University, 2004.

Mojon, B. “Financial Structure and The Interest Rate Channel of
ECB Monetary Policy.” European Central Bank Working Paper,
no. 40 (2000): 5-45.

Muelgini, Y. “Pemetaan Mekanisme Transmisi Kebijakan Moneter
di Indonesia.” Ph. D dissertation, Universitas Indonesia, 2004.

Natsir, M. “Studi Efektifitas Mekanisme Transmisi Kebijakan
Moneter di Indonesia Melalui Jalur Suku Bunga dan Jalur Nilai
Tukar serta Jalur Ekspektasi Inflasi Periode 1990:2-2007:1.”Ph.D dissertation, University of Airlangga, 2008.

Safuan, S., and B.Y.G. Laksono. “Transmisi Kebijakan Moneter di
Indonesia: Credit View atau Money View?” Jurnal Ekonomi dan
Pembangunan Indonesia 7, no. 2 (2007): 93-103.

Samba, M.C., and Y. Yan. “Interest Rate Pass-Through in the
Central African Economy and Monetary Community (CAEMC)
Area: Evidence from an ADRL Analysis.” International Journal
of Business and Management 5, no.1 (2010): 31-41.

Taylor, J.B. “The Monetary Transmission Mechanism: An Empirical
Framework.” The Journal of Economic Perspectives 9, no. 4
(1995): 11-26.

Warjiyo, P. Mekanisme Transmisi Kebijakan Moneter di Indonesia.
Jakarta: Pusat Pendidikan dan Studi Kebanksentralan - Bank
Indonesia, 2004.

Yiding, Y. and Z. Shuanghong, “Empirical Analysis of the Monetary
Policy Transmission through Interest Rate Channel in
China.”England: University of Brighton, 2006.

Zulverdi, D., and M.S. Santoso.“Dampak Perubahan Struktur Sistem
Keuangan Terhadap Transmisi Kebijakan Moneter di Indonesia.”
Bank Indonesia Working Paper, no. 06 (2005).

Downloads

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 https://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/254

Issue

Section

Articles