Monetary Transmission Mechanism Under Dual Financial System in Indonesia: Credit-Financing Channel

Abstract

The presence of Islamic and conventional banking in the dual financial system of Indonesia equally hold the role as financial intermediator which theoretically banks collect fund from the debitors to be distributed to creditors. However, along with the changing of time there has been a development in the financial industry, when financial deregulation occurs, where the role of providing credit is not only owned by the banks but also other financial institutions. As the result, banks are no longer considered as the center of financial intermediation but could be replaced by other financial instruments. This study aims to reconsider the role of banking as financial intermediation in the monetary transmission mechanism using three methodoligal approaches which are Vector Autoregression and Vector Error Correction Model (VAR-VECM), Error Correction Model (ECM), and Autoregressive Distributed Lag (ARDL). The long-term results of ECM and VECM estimations both show that credit and finacing channel are still relevant to be employed in the monetary transmission mechanism after the development of financial sector and the change of monetary policy, yet only have an impact to economy and do not give effect to inflation. While the result of ARDL estimation indicates that none of the variables affect the monetary policy objectives which means that credit and financing channel are considered to be getting weaker in the monetary transmission mechanism.
 
 Keywords : Monetary Transmission Mechanism, Credit Channel, Dual Financial System
 JEL Classification: E51, E52, E58

Islamic Bank and Monetary Policy: The Case of Indonesia

“…This suggests that Islamic banks have not been proven to function as transmitters of monetary policy. This is in line with with Fikri (2018), who demonstrated that Islamic banks are not efficient transmitters, unlike their conventional counterparts. Rafay and Farid (2019) investigated the role of Islamic banks in monetary transmission in Pakistan.…”

“…This paper aims to fill the gap by focusing solely on the role of Islamic banks in Indonesia in the monetary transmission process. It therefore differs from the studies of Ascarya (2012Ascarya ( , 2014, Herianingrum and Syapriatama (2016), Setiawan and Karsinah (2016), Widodo (2017) and Fikri (2018), which analyzed both conventional and Islamic bank samples. Zulkhibri and Sukmana (2017) employed panel regression analysis, while this paper uses time-series econometrics, i.e Autoregressive Distributed Lag (ARDL), with additional analysis using Granger Causality.…”

“…Sukmana and Ascarya (2010) examined the role of Islamic stock markets in transmitting monetary policy. Ascarya (2012Ascarya ( , 2014, Herianingrum and Syapriatama (2016), Setiawan and Karsinah (2016), Widodo (2017) and Fikri (2018) investigated the transmission process through both conventional and Islamic banking, while Zulkhibri and Sukmana (2017) and Octaviani and Arif (2018) examined the transmission process through Islamic banks, specifically passing through their financing. This paper aims to fill the gap by focusing solely on the role of Islamic banks in Indonesia in the monetary transmission process.…”

A Comparative Study of Indonesian and Malaysian Monetary Policy

“…Also, there are two classes of monetary policy, namely expansionary monetary policy to increase the money supply and contractive monetary policy to reduce the money supply. The central bank itself issued this monetary policy through three instruments, namely Open Market Operations (OMO), discount policy and legal reserve requirement (LRR) (Fikri, 2019).…”

“…Other studies that examine monetary policy in Indonesia and Malaysia, including conducted by (Wibowo, 2014) that the benchmark interest rate in setting inflation policy targets in Indonesia is slower when compared to the Singapore and Malaysia benchmark interest rates. Furthermore, research conducted by (Fikri, 2019) the results explain that credit financing is a relevant factor in influencing monetary policy in Indonesia which uses a dual monetary policy system; (Ahmad & Ismail, 2019) hat gross domestic product can be used as an indicator of monetary taxation; (Chaidir, 2019) explained that the exchange rate is the factor that most influences the inflation rate so that and impacts on monetary policy.…”