Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

Abstract

Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

Can Sharia Finance Affect Indonesia’s Economic Growth?

“…This shows the contribution variable this to growth economy enough exhilarating. Finding this supported by Suriani et al, (2021) found that sukuk has a connection in upgrade growth economy through policy variable monetary as level interest and price share through asset price and value exchange. Finding interaction dynamic between sukuk and variables economy other give implication important policy for development domestically, especially in the sukuk market in the global Islamic capital market.…”

“…Several studies have looked into the numerous connections between capital market developments and Indonesia's economic growth. According to Suriani et al, (2021), sukuk has a two-way causal link with economic growth through asset prices and exchange rate channels, however there is no causal association between Sukuk and inflation through asset prices and exchange rate channels. Through asset prices and exchange rate channels, sukuk are also explained to have a causal relationship with monetary policy variables, interest rates, and stock prices.…”

Effectiveness of Islamic Monetary Policy Transmission on Inflation and Economic Performance

“…Research related to the effectiveness of the transmission of Islamic monetary policy has been widely carried out. The findings yielded in significant positive and negative results (Hassan et al, 2021;Selim, 2020;Suriani et al, 2021).…”

Causality between Green Stock Market with Monetary Policy, Global Uncertainty, and Environmental Damage in Indonesia

“…Empirical studies that analyze the factors that influence fluctuations in stock markets in several countries have been carried out by previous economists, such as monetary policy factors (Mishkin, 1978;Majid and Yusof, 2009;Gregoriou et al, 2009;Laopodis, 2010;Hojat and Sharifzadeh, 2017;Suriani et al, 2021;Tomar and Kesharwani, 2022). In addition to monetary policy, the source of economic fluctuations that is considered important is uncertainty (Bloom, 2009;Christiano et al, 2014;Gilchrist et al, 2014;Dery and Serletis, 2021).…”