IDEAS home Printed from https://ideas.repec.org/a/bla/growch/v45y2014i2p240-262.html
   My bibliography  Save this article

The Regional Impact of Monetary Policy in Indonesia

Author

Listed:
  • Masagus M. Ridhwan
  • Henri L. F. Groot
  • Piet Rietveld
  • Peter Nijkamp

Abstract

This paper employs vector autoregressive (VAR) models to measure the impact of monetary policy shocks on regional output in Indonesia. We find substantial cross-regional variation in policy responses in terms of both magnitude as well as timing. Our work adds to the existing literature by providing insights from a large developing country, viz. Indonesia, where monetary policy has both a national and a regional dimension. The results support previous findings that the differential regional effects of monetary policy are significantly related to sectoral composition (especially the share of manufacturing), providing evidence for the relevance of the interest rate channel of monetary policy. We also find that firm size contributes to these differences, providing evidence for the importance of the credit channel. As a whole, both types of channels appear to operate simultaneously in the decentralized Indonesian monetary policy and to impact on the real part of the regional economy.

Suggested Citation

  • Masagus M. Ridhwan & Henri L. F. Groot & Piet Rietveld & Peter Nijkamp, 2014. "The Regional Impact of Monetary Policy in Indonesia," Growth and Change, Wiley Blackwell, vol. 45(2), pages 240-262, June.
    • Handle: RePEc:bla:growch:v:45:y:2014:i:2:p:240-262
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/grow.12045
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    3. Michael Owyang & Howard Wall, 2009. "Regional VARs and the channels of monetary policy," Applied Economics Letters, Taylor & Francis Journals, vol. 16(12), pages 1191-1194.
    4. Cochrane, John H., 1998. "What do the VARs mean? Measuring the output effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 277-300, April.
    5. Saikkonen, Pentti & Lütkepohl, Helmut, 2000. "Testing For The Cointegrating Rank Of A Var Process With An Intercept," Econometric Theory, Cambridge University Press, vol. 16(3), pages 373-406, June.
    6. Sheila C. Dow & Alberto Montagnoli, 2007. "The Regional Transmission of UK Monetary Policy," Regional Studies, Taylor & Francis Journals, vol. 41(6), pages 797-808.
    7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    8. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    9. Ivo J. M. Arnold & Evert B. Vrugt, 2004. "Firm Size, Industry Mix and the Regional Transmission of Monetary Policy in Germany," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 35-59, February.
    10. Lanne, Markku & Lutkepohl, Helmut, 2002. "Unit root tests for time series with level shifts: a comparison of different proposals," Economics Letters, Elsevier, vol. 75(1), pages 109-114, March.
    11. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    12. Lutkepohl, Helmut & Saikkonen, Pentti & Trenkler, Carsten, 2003. "Comparison of tests for the cointegrating rank of a VAR process with a structural shift," Journal of Econometrics, Elsevier, vol. 113(2), pages 201-229, April.
    13. Hal Hill, 2000. "Indonesia: The Strange and Sudden Death of a Tiger Economy," Oxford Development Studies, Taylor & Francis Journals, vol. 28(2), pages 117-139.
    14. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    15. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, vol. 49(6), pages 1543-1569, August.
    16. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156, National Bureau of Economic Research, Inc.
    17. McCulloch, Neil & Sjahrir, Bambang Suharnoko, 2008. "Endowments, location or luck ? evaluating the determinants of sub-national growth in decentralized Indonesia," Policy Research Working Paper Series 4769, The World Bank.
    18. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    19. Saikkonen, Pentti & Lutkepohl, Helmut, 2000. "Testing for the Cointegrating Rank of a VAR Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 451-464, October.
    20. Stefano G. Athanasoulis & Eric van Wincoop, 2001. "Risk Sharing Within The United States: What Do Financial Markets And Fiscal Federalism Accomplish?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 688-698, November.
    21. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    22. Fratantoni, Michael & Schuh, Scott, 2003. "Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-589, August.
    23. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    24. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    25. Gert Peersman & Frank Smets, 2005. "The Industry Effects of Monetary Policy in the Euro Area," Economic Journal, Royal Economic Society, vol. 115(503), pages 319-342, April.
    26. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    27. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    28. Joe Ganley & Chris Salmon, 1997. "The Industrial Impact of Monetary Policy Shocks: Some Stylised Facts," Bank of England working papers 68, Bank of England.
    29. Mr. Benedict J. Clements & Mr. Zenon Kontolemis & Mr. Joaquim Vieira Ferreira Levy, 2001. "Monetary Policy Under EMU: Differences in the Transmission Mechanism?," IMF Working Papers 2001/102, International Monetary Fund.
    30. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
    31. Hal Hill & Budy Resosudarmo & Yogi Vidyattama, 2008. "Indonesia'S Changing Economic Geography," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 44(3), pages 407-435.
    32. Charles B. Garrison & Hui S. Chang, 1979. "The Effect of Monetary and Fiscal Policies on Regional Business Cycles," International Regional Science Review, , vol. 4(2), pages 167-180, December.
    33. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-840, September.
    34. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    35. Markku Lanne & Helmut Lütkepohl & Pentti Saikkonen, 2002. "Comparison of unit root tests for time series with level shifts," Journal of Time Series Analysis, Wiley Blackwell, vol. 23(6), pages 667-685, November.
    36. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    37. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
    38. Gerald A. Carlino & Robert H. DeFina, 1997. "The differential regional effects of monetary policy: evidence from the U.S. States," Working Papers 97-12, Federal Reserve Bank of Philadelphia.
    39. Ramana Ramaswamy & Torsten Sløk, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 374-396, June.
    40. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
    41. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, December.
    42. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
    43. Lutkepohl, Helmut & Saikkonen, Pentti, 2000. "Testing for the cointegrating rank of a VAR process with a time trend," Journal of Econometrics, Elsevier, vol. 95(1), pages 177-198, March.
    44. Donald L. Schunk, 2005. "The differential impacts of monetary policy: Are the differences diminishing?," Papers in Regional Science, Wiley Blackwell, vol. 84(1), pages 127-136, March.
    45. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Blanco, Emilio & Elosegui, Pedro & Izaguirre, Alejandro & Montes-Rojas, Gabriel, 2019. "Regional and state heterogeneity of monetary shocks in Argentina," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    2. Anping Chen & Nicolaas Groenewold, 2019. "Regional resilience in China: The response of the provinces to the growth slowdown," Economics Discussion / Working Papers 19-06, The University of Western Australia, Department of Economics.
    3. Anping Chen & Nicolaas Groenewold, 2019. "The effects of China’s growth slowdown on its provinces: Disentangling the sources," Growth and Change, Wiley Blackwell, vol. 50(4), pages 1260-1279, December.
    4. Vadim Napalkov & Anna Novak & Andrey Shulgin, 2021. "Variations in the Effects of a Single Monetary Policy: The Case of Russian Regions," Russian Journal of Money and Finance, Bank of Russia, vol. 80(1), pages 3-45, March.
    5. Barkhordari, Sajjad & Forughi Far, Mohsen, 2020. "The Dynamic Regional Effects of Monetary Policy on Employment in Iran (TVP-FAVAR Approach)," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 6(4), pages 109-136, February.
    6. Dominguez-Torres, Helena & Hierro, Luis Ángel, 2020. "Are there monetary clusters in the Eurozone? The impact of ECB policy," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 56-76.
    7. Saibal Ghosh, 2013. "The economics and politics of output volatility: evidence from Indian states," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(1), pages 110-134, January.
    8. Andrei Shevelev & Maria Kvaktun & Kristina Virovets, 2021. "Effect of Monetary Policy on Investment in Russian Regions," Russian Journal of Money and Finance, Bank of Russia, vol. 80(4), pages 31-49, December.
    9. Groenewold, Nicolaas, 2018. "Australia saved from the financial crisis by policy or by exports?," Journal of Policy Modeling, Elsevier, vol. 40(1), pages 118-135.
    10. Angeliki ANAGNOSTOU & Stephanos PAPADAMOU, 2014. "The Impact Of Monetary Shocks On Regional Output: Evidence From Four South Eurozone Countries," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 39, pages 105-130.
    11. Ageliki Anagnostou & Stephanos Papadamou, 2012. "The effects of Monetary Policy shocks across the Greek Regions," ERSA conference papers ersa12p507, European Regional Science Association.
    12. Svensson, Emma, 2012. "Regional Effects of Monetary Policy in Sweden," Working Papers 2012:9, Lund University, Department of Economics, revised 01 Mar 2013.
    13. Chandra Utama & Miryam B.L. Wijaya & Charvin Lim, 2017. "The Role Of Interest Rates And Provincial Monetary Aggregate In Maintaining Inflation In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 19(3), pages 267-286, January.
    14. Aloysius Gunadi Brata & Henri L. F. de Groot & Wouter Zant, 2018. "The Impact of the 2006 Yogyakarta Earthquake on Local Economic Growth," Economics of Disasters and Climate Change, Springer, vol. 2(2), pages 203-224, July.
    15. Li, Huan & Ni, Jinlan & Xu, Yueli & Zhan, Minghua, 2021. "Monetary policy and its transmission channels: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    16. Hasan Engin DURAN & Umut ERDEM, 2014. "Regional Effects Of Monetary Policy: Turkey Case," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 14(1), pages 133-144.
    17. Anping Chen & Nicolaas Groenewold, 2019. "Macroeconomic shocks in China: Do the distributional effects depend on the regional source?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 62(1), pages 69-97, February.
    18. Harry Aginta & Masakazu Someya, 2022. "Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-25, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Masagus M. Ridhwan & Henri L.F. de Groot & Peter Nijkamp, 2010. "The Impact of Monetary Policy on Economic Activity - Evidence from a Meta-Analysis," Tinbergen Institute Discussion Papers 10-043/3, Tinbergen Institute.
    2. Ageliki Anagnostou & Stephanos Papadamou, 2012. "The effects of Monetary Policy shocks across the Greek Regions," ERSA conference papers ersa12p507, European Regional Science Association.
    3. Stefanos Papadamou & Vaggelis Arvanitis & Costas Siriopoulos, 2014. "A Bank Lending Channel that is Working via Housing or via Consumer Loans? Evidence from Europe," Bulletin of Applied Economics, Risk Market Journals, vol. 1(1), pages 15-34.
    4. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
    5. Zan Yang & Shuping Wu & Yanhao Shen, 2017. "Monetary Policy, House Prices, and Consumption in China: A National and Regional Study," International Real Estate Review, Global Social Science Institute, vol. 20(1), pages 23-49.
    6. I. Arnold & C.J.M. Kool & K. Raabe, 2005. "New evidence on the firm size effects in US monetary policy transmission," Working Papers 05-11, Utrecht School of Economics.
    7. Jeremy Lawson & Daniel Rees, 2008. "A Sectoral Model of the Australian Economy," RBA Research Discussion Papers rdp2008-01, Reserve Bank of Australia.
    8. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    9. Roy, Ripon & Bashar, Omar H.N.M. & Bhattacharya, Prasad Sankar, 2023. "The cross-industry effects of monetary policy: New evidence from Bangladesh," Economic Modelling, Elsevier, vol. 127(C).
    10. Tasneem Alam & Muhammad Waheed, 2006. "Sectoral Effects of Monetary Policy: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 1103-1115.
    11. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta-Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
    12. Vargas-Silva, Carlos, 2008. "Monetary policy and the US housing market: A VAR analysis imposing sign restrictions," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 977-990, September.
    13. Jean Louis, Rosmy & Brown, Ryan & Balli, Faruk, 2011. "On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?," Economic Modelling, Elsevier, vol. 28(6), pages 2701-2718.
    14. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    15. Auer, Simone, 2019. "Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 142-166.
    16. Francis Neville & Owyang Michael T. & Sekhposyan Tatevik, 2012. "The Local Effects of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-38, March.
    17. Hasan Engin Duran & Pawe³ Gajewski, 2023. "State-level Taylor rule and monetary policy stress," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 89-120, March.
    18. Ageliki Anagnostou & Stephanos Papadamou, 2016. "Regional asymmetries in monetary policy transmission: The case of the Greek regions," Environment and Planning C, , vol. 34(5), pages 795-815, August.
    19. Monticello, Carlo & Tristani, Oreste, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 2, European Central Bank.
    20. Angeliki ANAGNOSTOU & Stephanos PAPADAMOU, 2014. "The Impact Of Monetary Shocks On Regional Output: Evidence From Four South Eurozone Countries," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 39, pages 105-130.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:growch:v:45:y:2014:i:2:p:240-262. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0017-4815 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.