Does Monetary Transmission Effective? Evidence from Indonesia

Abstract

This study aims to examine the effects of monetary policy in Indonesia on real variables represented by output and nominal variables represented by inflation. This research is based on an autoregressive distributed model (ARDL) approach which includes lag for the dependent variable and its explanatory variables as regressors. So it is appropriate to analyze time-series data dynamically. Monetary policy variables include deposit interest rate, lending interest rate, asset/stock price, and exchange rate. The results show that the deposit interest rate has a negative effect on inflation in the short run, meanwhile, the lending interest rate has a negative effect on inflation in the long run. Also, the lending interest rate has an effective effect on output in the short run. This study also proves that stock price has a positive effect on the monetary transmission to inflation. This is an important finding considering that the value of assets and individual wealth can affect aggregate demand. These findings have implications for the importance of monetary policy as a policy of stabilizing inflation and output in the short run and stabilizing inflation in the long run by emphasizing the interest rate channel, in addition to seeing the importance of the asset price channel.

Impact Analysis Of Monetary And Fiscal Policies On Indonesia’s Economic Growth

“…Despite its use as a countercyclical tool to stimulate economic growth, monetary policy can also lead to an increase in prices due to an increase in money supply. This outcome is consistent with the findings of previous studies (Arintoko & Kadarwati, 2022;Nyumuah, 2018;Abbasinejad et al, 2018;Sethi et al, 2019;Mandel et al, 2019;Arintoko, 2021;Tai Nguyen et al, 2022).…”

“…The relationship between economic growth and monetary policy, specifically the role of policy interest rates, was extensively examined by (Arintoko & Kadarwati, 2022) using the VAR method, which showed that policy interest rates respond positively to unexpected GDP changes. Previous studies have suggested that monetary policy plays a crucial role in regulating economic growth, inflation, and exchange rates (Nyumuah, 2018); (Abbasinejad et al, 2018); (Sethi et al, 2019); (Mandel et al, 2019) (Arintoko, 2021); (Tai Nguyen et al, 2022). (Kim & Lim, 2018) and (Kim et al, 2020) note that monetary policy shocks can affect exchange rates.…”