A Study on the Dual Transmission Mechanism of Monetary Policy in Indonesia
Abstract
This paper aims to explore the dual transmission mechanism of monetary policy in Indonesia, focusing on how changes in policy instruments simultaneously affect the real and financial sectors. The dual transmission operates through two primary channels: the interest rate channel and the credit (financing) channel. In the Indonesian context, the effectiveness of this mechanism is shaped by the structure of the financial system, the degree of banking intermediation, and the institutional differences between conventional and Islamic banking. The study finds that the impact of monetary policy changes on inflation and economic growth is not always symmetric, as it depends on the strength of the interaction between money demand, interest rates, and credit distribution. By utilizing historical data and monetary policy records from Bank Indonesia, this study highlights how open market operations influence both liquidity and real economic indicators. Evidence suggests that post-COVID, Indonesia experienced notable improvements in price stability and GDP growth. When compared to countries like Turkey and Malaysia, Indonesia’s overall economic recovery has been strong, despite its lower GDP per capita. Furthermore, the findings underscore the growing role of Islamic financial instruments, which have shown potential to directly affect the real sector through money demand and supply mechanisms originating from Islamic banking.
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