Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces

Abstract

We analyze how regional economic structures affect the impact of monetary policy on rates of inflation across 34 Indonesian provinces. The paper first applies structural factor augmented vector autoregressive model (SFAVAR) to all the 34 provinces based on monthly provincial data in order to measure the length and magnitude of responses of regional inflation to monetary policy shock, derived from the consequential impulse response functions of 34 provinces. In the second step, we analyze the impact of economic structures on the length and magnitude of regional inflationary responses of 34 provinces. We find that the impacts of monetary policy across regions are significantly influenced by economic structural variables such as manufacturing sector share to GDP, mining sector share to GDP, bank lending share to GDP and export share to GDP. In addition, we found the spatial lag, rate of inflation of neighboring provinces, is also statistically significant. In a similar fashion, economic structural variables such as manufacturing sector share to GDP, construction sector share to GDP and investment share to GDP are found statistically significant in explaining regional differences of monetary policy efficiency. Our findings imply economic structures of provinces have to be incorporated to designing monetary policy in Indonesia.

Effectiveness and Conduct of Macroprudential Policy in Indonesia in 2003-2020: Evidence from the Structural VAR Models

“…They enable us to demonstrate that the LTV policy can contain the credit expansion in the medium term. Policy transmission to the real property prices, however, is counterintuitive and resembles the well-known price puzzle identified in many studies on monetary policy (see, e.g., Jung & Ryu, 2020, Aginta & Someya, 2022. At the same time, the puzzling price response is in line with a recent finding by Luangaram and Thepmongkol (2022), who claim that in a country with low financial development, more restrictive LTV limits cannot have a significant impact on interest rates and property prices.…”

Unraveling the Supply-Side Factors Shaping East Java’s Economy: Insights From Pca and Machine Learning

“…Research conducted by Aginta and Someya (2022) explains that the dynamics of economic growth are significantly influenced by economic structure, which can be measured by the proportion of specific industrial sectors, human capital, infrastructure development, and other indicators. The dominance of specific economic sectors can ultimately affect a region's economic resilience in response to monetary policy transmission.…”

Asymmetric Impacts of Monetary Policy Shock on Output Gap: Evidence From Regions in Indonesia

“…Second, this is the first paper on Indonesia which combines the VAR and spatial econometric models to investigate the asymmetric impact of monetary policy on regional output gaps as well as the factors causing the heterogeneous responses. Although previous studies have highlighted the possibility of spatial dependence on the regional responses of monetary policy (Salvatore et al, 2021;Aginta and Someya, 2021), none of them has implemented an opportune spatial approach to observe this issue.…”

“…Consequently, monetary policy change mostly only responds to the macroeconomics dynamics of the Java Island. To our knowledge, there are only two studies on the asymmetric impact of monetary policy between regions in Indonesia, and the former focused on the regional output responses (Ridhwan et al, 2011) while the latter focused on the regional inflation responses (Aginta and Someya, 2021).…”