The Regional Impact of Monetary Policy inIndonesia

Abstract

This paper employs vector autoregressive (VAR) models to measure the impact of monetary policy shocks on regional output in Indonesia. We find substantial cross‐regional variation in policy responses in terms of both magnitude as well as timing. Our work adds to the existing literature by providing insights from a large developing country, viz. Indonesia, where monetary policy has both a national and a regional dimension. 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 these differences, providing evidence for the importance of the credit channel. As a whole, both types of channels appear to operate simultaneously in the decentralized Indonesian monetary policy and to impact on the real part of the regional economy.

The effects of China’s growth slowdown on its provinces: Disentangling the sources

“…In this case, we identify the structural shocks using the Cholesky approach, assuming that the national shock (N) may affect both national and provincial growth rates contemporaneously but that the provincial shock (P) affects only the provincial growth rate within the period (although it will, generally, affect the nation with a lag through the model dynamics). This is similar to the assumption made by Ridhwan et al () in their analysis of the regional impact of monetary policy on the provinces in Indonesia.…”

Regional Effects of Monetary Policy in China: Evidence From China's Provinces

“…Ridhwan et al . () found that firm size and bank size play a role in explaining the regional effects of monetary policy in Indonesia, suggesting the relevance of the credit channel to some extent. However, their proof of the existence of the credit channel is rather weak.…”

“…However, their findings only give support to the existence of an interest rate channel, which was also confirmed by Weber () in Canada, Georgopoulos () in Australia, and Ridhwan et al . () in Indonesia. No evidence shows that a bank lending channel operates at the regional level.…”

The Impact of the 2006 Yogyakarta Earthquake on Local Economic Growth

“…The differences between economic sectors in responding to the shock can be influenced by the sectoral composition of the economy (Groot et al 2011;Ridhwan et al 2014) and the linkages between these sectors in an economic system or by its supply and demand (see Loayza et al 2012;Dekle et al 2014). As the affected regions are no closed economies, the shock may then have positive or negative spill-over impacts on other areas, depending on the spatial linkages between the regions.…”

“…This type of approach has been used in Groot et al (2011) on the crisis sensitivity of local economies in Europe. In addition, focussing on the regional heterogeneity of the impact of monetary policy in Indonesia, Ridhwan et al (2014) determine the role of cross-regional industrial composition (as represented by the share of manufacturing output). The panel model is formulated as follows:…”