Abstract
The objective of this study is to analyze the interdependency between monetary policy instruments and Indonesian economic growth for the periods of 2000 to 2011. The monetary policy instruments are open market operation (OPT), reserve requirement (RR), and discount rate. For the analysis, this study employs Structural Vector Autoregression, and Impulse Response Function. The results of the analysis show that Open market Operation (OPT), Reserve Requirement (RR), and discount interest rate (rDiskonto) have some degrees of interdependency on economic growth (GROW) through other intermediary macroeconomic variables. These variables are exchange rate, exports, imports, investment, and balance of payment, unemployment and inflation. Impulse Response Function showing a shock in OPT by one standard deviation has a negative effect on economic growth (for short-, medium, and long-terms) through out. In other words, if OPT increases, economic growth decreases. An increase in Reserve Requirement (RR) has an immediate negative impact on growth. In a slightly longer period, the impact of RR on growth becomes positive. However, in other periods (medium- and long-terms) the impact of RR on growth was negative. The increased rDiskonto can increase growth in the medium term, contrary to other periods. Key words: Interdependency, monetary policy, and economic growth.
Highlights
Monetary policy is planned and executed by a central bank to control money supply in order to achieve high employment growth and job vacancy, low inflation, balance of payments, and a desired economic development and growth (Pohan, 2008)
The step was to determine the length of the lag using Akaike Information Criterion (AIC), Schwarz Information Criterion (SIC), and Likelihood Ratio (LR) (Thomas, 1997; Greene, 2000; Alfirman and Sutriono, 2006)
All variables have been stationary at the second difference
Summary
Monetary policy is planned and executed by a central bank to control money supply in order to achieve high employment growth and job vacancy, low inflation, balance of payments, and a desired economic development and growth (Pohan, 2008). The monetary policy instruments are open market operation, reserve requirement and discount rate. The target variable is aggregate demand or GDP. The transmission mechanism of monetary policy is through intermediate macroeconomic variables such as interest rate and investment, and imports, exports, and balance of payments, among others. According to Keynes, fiscal policy is an important factor to determine aggregat demand, while monetary policy such as a change in money supply has relatively weak or even insignificant impact under certain condition on the economy. The mechanism of money supply to influence (JEL) classification: E31; F31; F43
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