Application of Error Correction Model (ECM) in stabilizing financial inclusion

Abstract

The study aims to analyze the effect of financial inclusion and macroeconomic indicators on financial system stability in Indonesia. The study uses secondary data obtained from Bank Indonesia, World Bank, International Monetary Fund (IMF) and other sources. The data used is a quarterly time series data from 2007Q1 to 2017Q4 in Indonesia. The method of data analysis is done by building an index to obtain the value of the index, a descriptive analysis of the movement of the index to describe the condition of Indonesia’s financial system stability during the evaluation period based the index value obtained. Econometric validation of index by analyzing the effect of financial inclusion and macroeconomicindicators on the stability of the Indonesia’s financial system using Error Correction Model (ECM). The movement of the index is fluctuating shows that in general financial system stability in Indonesia during the observation period is in the corridor of unstable conditions. The results show that financial inclusion in the short term does not affect financial system stability, but in the long run has a significant influence. GDP, IHSG and nominal exchange rate has a positive and significant influence in creating good financial system stability. The growth of the money supply (M2) has a negative and significant influence on the stability of the Indonesian financial system.