Green Monetary Policy Transmission and Inflation Dynamics in Indonesia: Empirical Evidence from the Central Bank's Sustainable Policy Framework
Keywords:
Green Monetary Policy; Monetary Transmission; Inflation; Sustainable Credit; Climate Risk; Macroeconomic Stability; SVAR.Abstract
This study analyzes the transmission mechanism of green monetary policy and its impact on inflation dynamics in Indonesia during the period of intensive implementation of sustainability policies by Bank Indonesia in 2022–2025. Green monetary policy integrates environmental sustainability principles into monetary instruments through financing incentives for low-emission sectors, sustainability-based liquidity policies, and strengthening climate risk mitigation in maintaining financial system stability. Using a Structural Vector Autoregression (SVAR) model with quarterly data, this study identifies structural linkages between green monetary instruments, sustainable credit expansion, key macroeconomic variables, and the inflation rate, while estimating the role of policy shocks on the monetary transmission channel. Empirical results show that green monetary instruments respond significantly to inflation dynamics through credit channels, interest rates, and inflation expectations. In the short term, green monetary policy shocks tend to reduce inflation volatility by increasing credit distribution to environmentally friendly sectors, which have relatively lower credit risks and stable growth prospects. In the long term, green monetary policy strengthens price stability by increasing productivity in the green sector, accelerating investment in renewable energy, and reducing exposure to climate risk to financial system stability. These findings demonstrate that integrating sustainability aspects into monetary policy design not only supports macroeconomic stability but is also a strategic instrument for driving the transition to a low-carbon economy in Indonesia. Policy implications emphasize the importance of consistent implementation of green monetary policy, cross-institutional synergy, and strengthening the regulatory framework to maximize its effectiveness.
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