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Responses of Islamic banking variables to monetary policy shocks in Indonesia

Author

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  • Aula Ahmad Hafidh

Abstract

Purpose - This paper investigates the structural model of vector autoregression (SVAR) of the interdependent relationship of inflation, monetary policy and Islamic banking variables (RDEP, RFIN, DEP, FIN) in Indonesia. By using monthly data for the period 2001M01-2019M12, the impulse response function (IRF), forecasting error decomposition variation (FEDV) is used to track the impact of Sharīʿah variables on inflation (prices). Design/methodology/approach - This research uses quantitative approach with SVAR model to reveal the problem. Findings - The empirical results of SVAR, the IRF show that policy shocks have a negative impact on all variables in Islamic banking except the equivalent deposit interest rate (RDEP). The impact of both conventional (7DRR) and Sharīʿah (SBIS) policies has a similar pattern. While the transmission of Sharīʿah monetary variables as a policy operational target in influencing inflation is positive. In addition, the FEDV clearly revealed that the variation in the Sharīʿah financial sector was relatively large in monetary policy shocks and their role in influencing prices. Originality/value - The empirical results of SVAR, the IRF show that policy shocks have a negative impact on all variables in Islamic banking except the equivalent deposit interest rate ‘RDEP’. The impact of both conventional “7DRR” and Sharīʿah “SBIS” policies has a similar pattern. While the transmission of Sharīʿah monetary variables as a policy operational target in influencing inflation is positive. In addition, the FEDV clearly revealed that the variation in the Sharīʿah financial sector was relatively large in monetary policy shocks and their role in influencing prices.

Suggested Citation

  • Aula Ahmad Hafidh, 2021. "Responses of Islamic banking variables to monetary policy shocks in Indonesia," Islamic Economic Studies, Emerald Group Publishing Limited, vol. 28(2), pages 174-190, July.
    • Handle: RePEc:eme:iespps:ies-11-2020-0049
    DOI: 10.1108/IES-11-2020-0049
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    More about this item

    Keywords

    Monetary policy transmission mechanism; Islamic banking; Structural VAR; C32; E44; E58; Q52; Q53;
    All these keywords.

    JEL classification:

    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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