Channels of Monetary Policy Transmission in Indonesia: A VAR Model Analysis
19 Pages Posted: 28 Nov 2018
Date Written: October 31, 2018
This study examines the various channels of monetary policy transmission mechanism in Indonesia. The interest rate, exchange rate, asset price and credit channels will be analysed using a VAR short-run restriction model for quarterly data, ranging from 2000Q1 to 2018Q1. The results show that the interest rate (cost of capital) channel is the most effective channel of monetary transmission in stabilising output and price level. Meanwhile, the exchange rate and asset price are the least effective channels of monetary policy, which operate via trade pass-through and Tobin’s q asset valuation channel. The credit channel is also found to be weak in controlling the price level.
Keywords: vector autoregression, monetary transmission mechanism, Indonesia
JEL Classification: C32, E52, E58
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