Effectiveness of Monetary Policy Transmission Mechanism in Indonesia

Ripdian Nisa M N,Edy Yusuf A G,Banatul Hayati

doi:10.15294/jejak.v11i1.12385

Abstract

This research aimed to analyse monetary mechanism effectivity to manage inflation in Indonesia through interest rate channel, credit channel, and expectation inflation channel. The research used Vector Error Correction Model (VECM) to analyze effectiveness of monetary policy transmission mechanism in Indonesia. The most effective channel was measured by result of Impulse Response Function and Variance Decomposition. They are: (1). The fastest time lag needed since the shock of monetary instruments (rSBI) until the realization of final target of monetary policy (inflation). (2). How strong the variables in each channel response the shock of SBI interest rate and other variable. The data used in this research is quarterly time series dara from 2005Q1 until 2016Q4. The results of this research show that the most effective channel in managing inflation during 2005Q1 until 2016Q4 is inflation expectation channel.

Highlights

The impact of monetary policy implementation on inflation is not immediate, but there is time lag through the monetary policy transmission mechanism
The results show that the shock caused by RSBI in the early period quickly responded by changes in inflation
Based on the results of Impulse Response Function and Variance Decomposition test, it can be concluded that the most effective monetary policy transmission mechanism is the inflation expectation path, since the time required to achieve the inflation target is for 34 quarters from 2005Q1 - 2016Q4

Summary

Introduction

The impact of monetary policy implementation on inflation is not immediate, but there is time lag through the monetary policy transmission mechanism. The effectiveness of the Monetary Policy Transmission Mechanism (MTKM) is measured by two indicators: first, how fast it is (time lag), second, how strong the variable power in determining economic variable and which financial variables which are the strongest to be leading indicator of inflation movement and the operational target of monetary policy are (Warjiyo, 2004). The control of inflation requires the active role of banking sector, the financial sector and the real sector in determining whether the monetary policy transmission process is in line with the central bank's target or not (Sir, 2012)

Objectives

Results

Conclusion