Transmission Mechanism in Dual Monetary System : Comparison between Shariah and Conventional Monetary System

Abstract

Transmission mechanism of monetary policy has been an area of critical economic research in many countries, whereby financial system links monetary policy and real one. In line with this, whatever events or trends that affect financial system would also lead to the changes in the monetary transmission mechanism. This study tries to analyze the transmission mechanism in Indonesia dual monetary system using Vector Auto Regression (VAR) and Vector Error Correction Model (VECM) methods.The result indicates that the relationship between Consumer Price Index (CPI) and Sharia Instruments Financing (LNFIN), Bank Indonesia Sharia Certificate (SBIS) and Sharia Inter Bank Money Market (PUAS) are negative. It denotes that when the total of sharia financing increases, it will give a positive contribution to reduce inflation rate in Indonesia. Henceforth, this system will create a balance growth between monetary and real sector economy. From the perspective of this finding, it is urging for the stakeholders of sharia finance, especially monetary authority, to accelerate sharia banking share in Indonesia. JEL Classification: C32, E31, E42, E52