The need for a good understanding of the relationship between financial inclusion and economic growth has become a significant concern in national development. Both sectors play an essential role in formulating income distribution policies and reducing poverty, evidence from Eastern Indonesia. This paper, therefore, empirically analyzes the contribution of the financial inclusion to economic growth, poverty alleviation and income inequality in Eastern Indonesia. The Toda-Yamamoto VAR bivariate causality model and the dynamic Panel Vector Autoregression (PVAR) were the two approaches used in this research. The effect and relationship of financial inclusion on economic growth, poverty, inequality and other factors were analyzed using PVAR, and Toda-Yamamoto VAR bivariate causality model, respectively. The results of the bivariate causality model indicate a high relationship level between financial inclusion, economic growth, poverty, and income distribution in Eastern Indonesia. The socio-economic growth has a positive impact on the level of financial inclusion, with a negative impact on poverty. Meanwhile, financial inclusion has a positive effect on inequality, which leads to widespread income inequality in Eastern Indonesia.

We analyze how regional economic structures affect the impact of monetary policy on rates of inflation across 34 Indonesian provinces. The paper first applies structural factor augmented vector autoregressive model (SFAVAR) to all the 34 provinces based on monthly provincial data in order to measure the length and magnitude of responses of regional inflation to monetary policy shock, derived from the consequential impulse response functions of 34 provinces. In the second step, we analyze the impact of economic structures on the length and magnitude of regional inflationary responses of 34 provinces. We find that the impacts of monetary policy across regions are significantly influenced by economic structural variables such as manufacturing sector share to GDP, mining sector share to GDP, bank lending share to GDP and export share to GDP. In addition, we found the spatial lag, rate of inflation of neighboring provinces, is also statistically significant. In a similar fashion, economic structural variables such as manufacturing sector share to GDP, construction sector share to GDP and investment share to GDP are found statistically significant in explaining regional differences of monetary policy efficiency. Our findings imply economic structures of provinces have to be incorporated to designing monetary policy in Indonesia.

This paper investigates the reasons for heterogeneous monetary policy effects on inflation rate across 34 Indonesian provinces. We evaluate monetary transmission by combining monetary SVAR model with factor analysis (Bernanke et al., 2005). In the first part of analysis, we demonstrate the cross-sectional variation in regional inflation responses to monetary policy shock. Spatially, most provinces in the Java-Bali region have similar responses to the national response. Moreover, provinces with a higher share of manufacturing industries in Java and Sumatra island have a response that higher than average. In the second part, we examine the role of regional economic structure in affecting two constructed measurements of monetary policy effects on regional inflation, namely total impacts and efficiency. Consistent with the literature, we find that the impacts of monetary policy across regions are significantly influenced by the economic structure of regions, represented by four variables (manufacturing and mining share to GDP, bank lending to GDP ratio, and export to GDP ratio). In addition, we also find the significant role of manufacturing growth and spatial inflation externality in shaping monetary policy impacts on regional inflation. In a similar fashion, six regional structural variables are found statistically significant in explaining regional differences of monetary policy efficiency. Our findings imply the well-functioning of interest rate, bank lending and exchange rate channels of monetary policy on regional inflation in Indonesia.