Financial Stress and Economic Activity Analysis in Indonesia

Abstract

Financial Stress marks the beginning of a crisis and may occur in all countries. This period is certainly unanticipated as it may disrupt a country's financial and monetary stability. An unstable financial system tends to be vulnerable to various stresses and may also hinder the transmission of monetary policy to function normally, thus resulting in ineffective monetary policy. This study aims to analyze financial and monetary stability in Indonesia using time series monthly data from January 1996 to January 2018. We used Vector Autoregressive (VAR) model. Our estimates suggest that the response of consumer price index to financial stress index takes longer to stabilize. This also applies to consumer price index response to consumer price index.