The Regional Impact of Monetary Policy in Indonesia

Abstract

This paper employs Vector Autoregression (VAR) models to measure the impact of monetary policy shocks on regional output in Indonesia. Having incorporated a possible structural break following the aftermath of the 1997-98 Asian Crisis, the impulse response functions derived from the estimated models reveal substantial cross-region variations in policy responses in terms of their magnitude and timing. Our work complements the existing literature by providing insights from a developing country. The results support previous findings that the differential regional effects of monetary policy are significantly related to sectoral composition (especially the share of manufacturing), providing evidence for the relevance of the interest rate channel of monetary policy. We also find that firm-size contributes to the differences, providing evidence for the relevance of the credit channel.