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Risk Behavior In The Transmission Mechanism Of Monetary Policy In Indonesia

Author

Listed:
  • Doni Satria

    (Universitas Negeri Padang)

  • Solikin M. Juhro

    (Bank Indonesia)

Abstract

This study explores interconnections between risk behavior in the financial sector, particularly banking sector, with monetary policy stance. Referring Bernanke and Blinder (1988) modified model for analyzing the bank credit behavior, we develop an empirical model to test the role of risk behavior in monetary policy transmission mechanism. Vector Error Correction Model is applied to test the significance of interaction between risk variables and monetary policy stance in the short run dynamics of credit behavior around its long-run co-integration with real GDP. Some empirical results emerge from this preliminary study. First, there is early indication that risk taking channel in the monetary policy transmission mechanism exists in Indonesia during analysis period. Second, risk variables and credit tend to move pro-cyclically while monetary policy stance tends to a-cyclical. Third, pro-cyclical behavior of credit and risk variables reverses the effect of loose monetary policy stance, and there is an indication of asymmetric effect between tight monetary policy and loose monetary policy in Indonesian economy. These empirical findings bring about policy recommendations for better understanding on the risk behavior in the banking sector, as well as integration between monetary and financial sector policies.

Suggested Citation

  • Doni Satria & Solikin M. Juhro, 2011. "Risk Behavior In The Transmission Mechanism Of Monetary Policy In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 13(3), pages 243-270, January.
    • Handle: RePEc:idn:journl:v:13:y:2011:i:3e:p:243-270
    DOI: https://doi.org/10.21098/bemp.v13i3.393
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary Policy Transmission Mechanism; Monetary Policy Stance; Banking Risk Behavior; Risk Perception.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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