The Interaction Between External Factor and Financial Cycle in Indonesia

Abstract

After the global financial crisis in 2008, economists believe that global economic conditions are a source of instability for the domestic economy in developing countries such as Indonesia. These external factors include fluctuations in global financial markets, volatility in commodity prices and capital inflows into the domestic economy which are known to have an impact on the financial cycle. This study explores the interaction of the three external factors to determine which factor has the most dominant interaction with the financial cycle in Indonesia. The interaction between external factors and the Indonesian financial cycle also means understanding the factors that affect the contraction period and expansion of the financial cycle in Indonesia. The study used time series data. The data used are secondary data from official publications, namely Bank Indonesia for data on capital flows and bank credit, the International Monetary Fund (IMF) for international commodity price index data and the global financial market valatility index (VIX). The analysis period in this research is 1993 first quarter to 2018 fourth quarter. This data sample selection is based on the availability of the longest data series using the quarterly data frequency in Indonesia. The result shows that shows that the interaction of total capital inflow to Indonesia has a pro-cyclical movement pattern with commodity price cycles and has a counter-cyclical movement pattern with the global financial cycle. Furthermore, the credit cycle to non-business fields is the cycle with the strongest interaction with all capital flow cycles analyzed in this study. Meanwhile, the total credit cycle and the credit cycle to the business field show a stronger procyclical interaction with the equity-based capital flow cycle than the interaction with the debt-based capital flow cycle

Transmission of Inflation and Exchange Rate Effects: The Markov Switching Vector Autoregressive Methodology

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