Finances, accounting and audit

Monetary policy transmission mechanisms in Indonesia: revisiting the role of Divisia money

Economic Annals-XXI

Economic Annals-ХХI: Volume 185, Issue 9-10, Pages: 91-98

Citation information:
Tang, M. M.-J., Puah, C.-H., & Purnamawati, I. G. A. (2020). Monetary policy transmission mechanisms in Indonesia: revisiting the role of Divisia money. Economic Annals-XXI, 185(9-10), 91-98. doi: https://doi.org/10.21003/ea.V185-09

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Maggie May-Jean Tang
PhD (Financial Economics),
Lecturer,
Faculty of Business, Design and Arts,
Swinburne University of Technology Sarawak Campus
Q5B, Kuching Sarawak, 93350, Malaysia
mtang@swinburne.edu.my
ORCID ID: https://orcid.org/0000-0002-3279-2538

Chin-Hong Puah
PhD (Economics),
Associate Professor,
Faculty of Economics and Business,
University of Malaysia Sarawak
Kota Samarahan, Sarawak, 94300, Malaysia
chpuah@unimas.my
ORCID ID: https://orcid.org/0000-0003-0187-7413

I Gusti Ayu Purnamawati
PhD Student (Economics),
Economic Faculty,
Universitas Pendidikan Ganesha
Singaraja, Bali, Indonesia
igapurnamawati@gmail.com
ORCID ID: https://orcid.org/0000-0003-3364-223X

Monetary policy transmission mechanisms in Indonesia: revisiting the role of Divisia money

Abstract. This study examines the performance of monetary policy transmission mechanisms in Indonesia from the money view. The best choice of a monetary policy transmission channel has been a topic of debate for many years among researchers as well as central banks. This is mainly due to the inconsistent performance of different channels across countries and period of time. Therefore, it is crucial for policymakers to have a prior understanding of the strengths of the various monetary policy transmission channels.

The role of Divisia money in the process of transmission mechanism has also been considered in the Structural Vector Autoregressive (SVAR) model of this study with eight variables and quarterly data from 1984Q1 to 2019Q4.

In Indonesia, interest-rates are the major tool used by the central bank to achieve the targeted inflation rate. However, our empirical analysis has shown otherwise, suggesting that other channels are better in ensuring the transmission smoothness of the monetary policy. In addition, depending on whether a short- or long-run effect is desired, a different channel should be adopted to transmit the intended impact. This study has affirmed the superiority of Divisia money since most of the fluctuations in the key domestic macroeconomic variables in Indonesia can be explained by the monetary aggregate.

Keywords: Divisia Money; Monetary Policy Transmission Mechanism; Macroeconomics; SVAR Model; Monetary Aggregate; Exchange Rate; Interest Rate; Central Bank; Indonesia

JEL Classification: E40; E52; C32

Acknowledgements and Funding: The authors received no direct funding for this research.

Contribution: The authors contributed equally to this work.

DOI: https://doi.org/10.21003/ea.V185-09

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Received 9.08.2020
Received in revised form 29.09.2020
Accepted 6.10.2020
Available online 21.11.2020
Updated version of the paper as of 20.12.2020

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