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Does Financial Development Absorb Or Amplify The Shock?

Author

Listed:
  • Meily Ika Permata

    (Bank Indonesia)

  • Ibrahim

    (Bank Indonesia)

  • Hidayah Dhini Ari

    (Bank Indonesia)

Abstract

This paper analyzes the role of financial development on economic output in Indonesia. Using vector autoregressive method, the results confirm the positive impact of financial development on output growth. The interaction between the financial development and the shock either in financial or real sector shows that the financial development has a positive role to dampen the negative impact of the shock on the output growth, while strengthen the positive one. Another variable on the model, which significantly affect the output growth are excess money, term of trade, and the price. Compare to these variables, the marginal effect of financial development on output is smaller.

Suggested Citation

  • Meily Ika Permata & Ibrahim & Hidayah Dhini Ari, 2011. "Does Financial Development Absorb Or Amplify The Shock?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 14(2), pages 107-126, October.
    • Handle: RePEc:idn:journl:v:14:y:2011:i:2e:p:107-126
    DOI: https://doi.org/10.21098/bemp.v14i2.81
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    References listed on IDEAS

    as
    1. Bacchetta, Philippe & Caminal, Ramon, 2000. "Do capital market imperfections exacerbate output fluctuations?," European Economic Review, Elsevier, vol. 44(3), pages 449-468, March.
    2. Beck, Thorsten & Lundberg, Mattias & Majnoni, Giovanni, 2006. "Financial intermediary development and growth volatility: Do intermediaries dampen or magnify shocks?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1146-1167, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial development; shock; output volatility; VAR;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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