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Evaluation of Bank Indonesia Policy Mix Transmission

Author

Listed:
  • Rizki E. Wimanda

    () (Bank Indonesia)

  • Novi Maryaningsih

    () (Bank Indonesia)

  • Linda Nurliana

    () (Bank Indonesia)

  • Redianto Satyanugroho

    () (Bank Indonesia)

Abstract

This paper examines how the policies of Bank Indonesia are transmitted in the economy, especially towards the final targets for inflation and the stability of the financial system. In this study, the policies analysed include monetary and macro-prudential policy. Empirically, monetary policy is able to influence inflation and the stability of the financial system with a lag of 18 and 10 months respectively. The monetary policy transmission channels that are identified with the interest rate channel are the most dominant in transmitting monetary policy toward inflation, while the asset prices channel is the most dominant in transmitting the BI rate toward stability of the financial system. Macro-prudential policy, in general, can affect intermediate targets in accordance with the policy goals on a moderate scale albeit temporarily. However, macro-prudential policy tightening has not yet been effective in influencing final targets such as inflation and financial system stability. From estimates of the ballance sheet channel it can be seen that monetary policy can also be effectively transmitted through company balance sheets. The balance sheet coefficient indicator is increasingly sensitive following tight monetary policy. This signifies the closer association between internal funding and investment in line with the greater difficulty of obtaining external funds. This was the case for smaller companies which typically face financial constraints. When monetary policy is loose, by contrast, the balance sheet coefficient is increasingly insensitive, meaning that the role of internal funding on investing is not as strong as it is under other conditions besides being an indication that it is easier to obtain external funding.

Suggested Citation

  • Rizki E. Wimanda & Novi Maryaningsih & Linda Nurliana & Redianto Satyanugroho, 2014. "Evaluation of Bank Indonesia Policy Mix Transmission," Working Papers WP/3/2014, Bank Indonesia.
  • Handle: RePEc:idn:wpaper:wp032014
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    More about this item

    Keywords

    Transmission Mechanism; SFAVAR; Panel Data;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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