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Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces

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  • Harry Aginta

    (Nagoya University)

  • Masakazu Someya

    (Nagoya University)

Abstract

We analyze how regional economic structures affect the impact of monetary policy on rates of inflation across 34 Indonesian provinces. The paper first applies structural factor augmented vector autoregressive model (SFAVAR) to all the 34 provinces based on monthly provincial data in order to measure the length and magnitude of responses of regional inflation to monetary policy shock, derived from the consequential impulse response functions of 34 provinces. In the second step, we analyze the impact of economic structures on the length and magnitude of regional inflationary responses of 34 provinces. We find that the impacts of monetary policy across regions are significantly influenced by economic structural variables such as manufacturing sector share to GDP, mining sector share to GDP, bank lending share to GDP and export share to GDP. In addition, we found the spatial lag, rate of inflation of neighboring provinces, is also statistically significant. In a similar fashion, economic structural variables such as manufacturing sector share to GDP, construction sector share to GDP and investment share to GDP are found statistically significant in explaining regional differences of monetary policy efficiency. Our findings imply economic structures of provinces have to be incorporated to designing monetary policy in Indonesia.

Suggested Citation

  • Harry Aginta & Masakazu Someya, 2022. "Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-25, December.
    • Handle: RePEc:spr:jecstr:v:11:y:2022:i:1:d:10.1186_s40008-021-00260-6
    DOI: 10.1186/s40008-021-00260-6
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    Cited by:

    1. Marek A. Dąbrowski & Dimas Mukhlas Widiantoro, 2023. "Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(3), pages 703-731, December.
    2. Aginta, Harry, 2023. "Revisiting the Phillips curve for Indonesia: What can we learn from regional data?," Journal of Asian Economics, Elsevier, vol. 85(C).
    3. Makram El-Shagi & Kiril Tochkov, 2024. "Regional Effects of Monetary Policy in China," CFDS Discussion Paper Series 2024/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    4. De Simone, Francisco Nadal, 2024. "The transmission of U.S. monetary policy to small open economies," Journal of International Money and Finance, Elsevier, vol. 142(C).

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    More about this item

    Keywords

    Monetary policy transmission; Economic structure; Inflation; Indonesia; E52; R11;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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