Analyzing monetary policies and bank credit in Indonesia’s provincial clusters amidst COVID-19 pandemic

Abstract

This research investigates the impact of monetary policy instruments employed by the Bank of Indonesia (BI), including reserve requirement (GWM), policy rate, and loan-to-value (LTV) ratio, on bank credit by sector in Indonesia. We utilize FMOLS and DOLS techniques to estimate the effects of policy instruments and COVID-19 variables on bank credit across six clusters of provinces. Our findings indicate that the GWM exhibits a negative impact, while the policy rate positively influences bank credit in all non-household sectors in Indonesia. The LTV instrument significantly affects bank credit in household sectors. Furthermore, The Covid-19 pandemic’s influence on the relationship between each policy instrument and bank credit varies across economic sectors and provincial clusters. We recommend BI to utilize the GWM and LTV instruments more frequently and exercise caution in reducing the policy rate to very low levels, as excessively low interest rates may not incentivize banks to increase lending.