Monetary Policy Transmission in the Financial Sector in Indonesia

Abstract

This study aims to analyze the monetary policy transmission mechanism in the financial sector in Indonesia using the Vector Autoregressive (VAR) method. The variables used include the BI 7-Day Reverse Repo Rate (B17DRR), Money Supply (JUB), Exchange Rate (NT), Total Bank Credit (TKB), and Credit Interest Rate (SBK) with observation periods according to the secondary data obtained. The results of the stationarity test indicate that all variables are stationary at the second difference level, and the optimal lag is determined at lag 2. The Johansen cointegration test indicates a long-term relationship between variables. Impulse Response Function analysis reveals that monetary policy shocks have a significant influence on financial sector variables in the initial period, but the effect tends to fade in the long term. Meanwhile, the results of the Forecast Error Variance Decomposition show that in the short term, NT movements are more influenced by itself, while in the medium to long term, the largest influence comes from TKB and JUB, with relatively small contributions from B17DRR and SBK. These findings confirm that credit and liquidity channels play a dominant role in the transmission of monetary policy in Indonesia, so strengthening the banking intermediation function and liquidity management is important to increase the effectiveness of monetary policy.