Time-Varying Impact of US Monetary Policy Spillovers on Small Open Economies: Evidence from Indonesia

Abstract

This study examines the impact of the US monetary policy spillover on Indonesia’s macroeconomic and financial variables using quarterly data for the period 2000–2020 for both domestic and US variables. We use the impulse responses obtained from an estimated Time-Varying VAR model with stochastic volatility to examine the response of real GDP, inflation, exchange rate, stock market return, and monetary policy rate to US monetary policy shock. We find that US monetary policy spillovers, on average, boost Indonesia’s real GDP, stock market returns, and bilateral exchange rate vis a vis the US Dollar but also trigger domestic inflation beyond what Indonesia’s policy reaction could counteract. However, there are considerable differences in the response of the variables to easing and tightening shocks, on the one hand, and conventional vs unconventional monetary policy, on the other. Finally, we found substantial time variation corresponding to major global events, including the Global Financial Crisis and implementation of unconventional monetary policy, the taper tantrum of 2013-2014, and the great lockdown in the wake of the Covid-19 pandemic in 2019-2020.