Monetary Policy, Foreign Interest Rate impact on Indonesian Bank Credit

Taufiq Carnegie Dawood

Abstract


This study adds to the economic knowledge by presenting proof based on data for Indonesia, on the consequence to credit provided by domestic banks, due to changes of monetary policy and foreign rates of interest. The subject matter is important for Indonesia because about 88 percent of its overall financing to the private sector in Indonesia are provided by domestic banks through credit channels. Consequently fluctuations of bank credit have significant impact on Indonesia’s financial system’s stability. Applying the Structural VAR method, the current study found that credit channeled by domestic banks in Indonesia are influenced by both rates of interest from abroad and the policy stance of Bank Indonesia. In addition it is found that foreign rates of interest effects bank credit negatively, but turns positive after 12 months. While a monetary contractionary monetary stance by Bank Indonesia decreases the quantity of credit provided by banks. These results underscores the limitation of monetary policy in managing bank credit growth. This results also underlines the need of Bank Indonesia to take into account the impact of foreign interest rates in conducting macro-prudential policies in overseeing credit growth to promote financial stability in Indonesia.


Keywords


foreign interest rate; bank credit; monetary policy, SVAR

Full Text:

PDF

References


Adrian, T., & Song Shin, H. (2010). Financial intermediaries and monetary economics. Handbook of Monetary Economics (Vol. 3). https://doi.org/10.1016/B978-0-444-53238-1.00012-0

Angelopoulou, E., & Gibson, H. D. (2009). The balance sheet channel of monetary policy transmission: Evidence from the United Kingdom. Economica, 76(304), 675–703. https://doi.org/10.1111/j.1468-0335.2008.00710.x

Aysun, U., & Hepp, R. (2011). Securitization and the balance sheet channel of monetary transmission. Journal of Banking and Finance, 35(8), 2111–2122. https://doi.org/10.1016/j.jbankfin.2011.01.011

Barnett, W. A., Bhadury, S. S., & Ghosh, T. (2016). An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy. Open Economies Review, 27(5), 871–893. https://doi.org/10.1007/s11079-016-9403-2

Bernanke, B. S., & Blinder, A. S. (1992). The federal funds rate and the channels of monetary transmission. American Economic Review, 82(4), 901–921. https://doi.org/10.2307/2117350

Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). Chapter 21 The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics. https://doi.org/10.1016/S1574-0048(99)10034-X

Bruno, V., & Shin, H. S. (2015). Capital flows and the risk-taking channel of monetary policy. Journal of Monetary Economics, 71, 119–132. https://doi.org/10.1016/j.jmoneco.2014.11.011

Chami, R., & Cosimano, T. F. (2010). Monetary policy with a touch of Basel. Journal of Economics and Business, 62(3), 161–175. https://doi.org/10.1016/j.jeconbus.2009.12.001

de Mello, L., & Pisu, M. (2010). The bank lending channel of monetary transmission in Brazil: A VECM approach. Quarterly Review of Economics and Finance, 50(1), 50–60. https://doi.org/10.1016/j.qref.2009.09.006

Dedola, L., & Lombardo, G. (2012). Financial frictions, financial integration and the international propagation of shocks. Economic Policy, 27(70), 319–359. https://doi.org/10.1111/j.1468-0327.2012.00286.x

Dell’ariccia, G., Laeven, L., & Suarez, G. A. (2017). Bank Leverage and Monetary Policy’s Risk-Taking Channel: Evidence from the United States. Journal of Finance, 72(2), 613–654. https://doi.org/10.1111/jofi.12467.

Delli Gatti, D., Gallegati, M., Greenwald, B., Russo, A., & Stiglitz, J. E. (2010). The financial accelerator in an evolving credit network. Journal of Economic Dynamics and Control, 34(9), 1627–1650. https://doi.org/10.1016/j.jedc.2010.06.019

Disyatat, P. (2011). The bank lending channel revisited. Journal of Money, Credit and Banking, 43(4), 711–734. https://doi.org/10.1111/j.1538-4616.2011.00394.x

Doan, T. (2013). RATS manual: version 8.3. Evanston: Estima.

Jiménez, G., Ongena, S., Peydró, J.-L., & Saurina, J. (2014). Hazardous Times for Monetary Policy: What do 23 Million Loans Say About the Impact of Monetary Policy on Credit Risk-Taking? Econometrica, 82(2), 463–505. https://doi.org/10.3982/ECTA10104

Matousek, R., & Sarantis, N. (2009). The bank lending channel and monetary transmission in Central and Eastern European countries. Journal of Comparative Economics, 37(2), 321–334. https://doi.org/10.1016/j.jce.2008.09.008

Mishkin, F. S. (2013). The Economics of Money, Banking, and Financial markets /. Pearson Publications Company. https://doi.org/10.1017/CBO9781107415324.004

Vera, D. (2012). How responsive are banks to monetary policy? Applied Economics, 44(18), 2335–2346. https://doi.org/10.1080/00036846.2011.564143

Zanforlin, L. (2011). Domestic Lending when Financial Markets are Integrated: Is it all for Real. Applied Economics Letters, 18.




DOI: https://doi.org/10.15294/jejak.v11i2.16056

Refbacks

  • There are currently no refbacks.




Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.