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The Impact Of Excess Liquidity On Monetary Policy

Author

Listed:
  • M. Barik Bathaluddin

    (Bank Indonesia)

  • Nur M. Adhi P

    (Bank Indonesia)

  • Wahyu A.W.

    (Bank Indonesia)

Abstract

This paper analyzes the excess liquidity especially on banking industry and its impact on monetary policy in Indonesia. We firstly investigate the determinants of bank behavior on their favor for excess liquidity both for precautionary motive and involuntary. Furthermore we determine the threshold between the low and high excess liquidity regimes. On the next step, this paper evaluates and compares the impact of excess liquidity on monetary policy between the two regimes. The first result shows that the excess liquidity on bank with their precautionary motive is significantly determined by the volatility of money demand, the volatility of economic growth, the bank cost of the bank, and also by the lag of excess liquidity, which conform its persistence. Secondly, using the Threshold-VAR approach, this paper shows the switching regime occurs in 2005 from low to high excess liquidity. Lastly, the excess liquidity reduces the effectiveness of monetary policy on controlling inflation.

Suggested Citation

  • M. Barik Bathaluddin & Nur M. Adhi P & Wahyu A.W., 2012. "The Impact Of Excess Liquidity On Monetary Policy," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 14(3), pages 245-267, January.
    • Handle: RePEc:idn:journl:v:14:y:2012:i:3f:p:245-267
    DOI: https://doi.org/10.21098/bemp.v14i3.404
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    More about this item

    Keywords

    Excess liquidity; Threshold VAR; monetary policy transmission mechanism;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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