Abstract
<p><em>This research aims to measure the effectiveness of monetary policy transmission, especially through the interest rate channel. The analysis was conducted on the first stage of its transmission, namely Interest Rate Pass-through (IRPT). IRPT refers to condition in which retail interest rate (both deposit and lending rate) responds to changes in policy rate of central bank. IRPT was measured using Error Correction Model (ECM) for time series data in the period of January 2010 - December 2015. The results of this study indicated that degree of long term and short term IRPT is incomplete for deposit and lending rate. In addition, IRPT for deposit rate is higher than lending rate, but the adjustment process of lending rate faster than deposit rate. Finally, model that include other variables (macroeconomic and internal banking indicator) generate long term IRPT which is smaller than the standard model. This results implies that the Central Bank, the FSA, and government needs to pay attention to the stability of the other variables that may interfere or reduce the effectiveness of monetary policy through the interest channel. </em></p><p><strong><em>JEL Classification: </em></strong>E42, E43, E52</p><strong><em>Keywords: </em></strong><em>Deposit rate, ECM, IRPT, Lending Rate, Policy Rate</em>
Highlights
The ultimate goal of monetary policy is to maintain currency stability, one of which is reflected in the low and stable rate of inflation
This is reasonable given that the interest rate pass-through (IRPT) measures the degree to which a central bank's policy rate is responded by changes in bank's retail interest
Monetary policy can be said to be effective if the instrument used by the Central Bank succeeds in influencing the ultimate goal e.g. inflation
Summary
The ultimate goal of monetary policy is to maintain currency stability, one of which is reflected in the low and stable rate of inflation. To achieve this objective, Bank Indonesia sets the Bank Indonesia rate (BI rate) as the main policy instrument to influence the economic activities. The degree of interest pass-through that became the first stage of monetary policy effectiveness has been the concern of researchers around the world This is reasonable given that the interest rate pass-through (IRPT) measures the degree to which a central bank's policy rate is responded by changes in bank's retail interest
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