Islamic Versus Conventional Monetary Transmission: Which One Is Better Affecting Exchange Rate?

Abstract

This study examined the impact of Islamic monetary and conventional transmissions on Indonesia's exchange rate performance. The Islamic monetary transmissions are musyarakah financing (proxied by the ratio of musyarakah to a total loan of conventional banks) and corporate sukuk (asset price), while the conventional transmission is the interbank interest rate (INTERB). Furthermore, this paper also incorporated gold price (GP) (asset price transmission) as a control variable. This study used monthly data from February 2011 to September 2021. By using the ARDL Bound Test, the long run results showed that the performance of Islamic monetary transmission through musyarakah financing has more effect of exchanging rate than INTERB. Therefore, Bank Indonesia should focus on musyarakah financing as its monetary transmission instead of INTERB. In the short run, corporate sukuk and musyarakah financing impact the exchange rate (10% and 1% significant level, respectively), while INTERB and GP can affect the exchange rate with lag (second month onward for each).