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Title: Monetary policy transmission mechanism and bank portfolio behaviour: the case of Indonesia
Author: Wibowo, Pungky Purnomo
Awarding Body: University of Birmingham
Current Institution: University of Birmingham
Date of Award: 2005
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This thesis assesses the implications of financial deregulation and financial innovation on the following aspects of monetary policy transmission and bank portfolio behaviour in Indonesia. Chapter 4 investigates monetary policy transmission by employing bank balance sheet (loans, deposits and securities) and main macroeconomic variables (exchange rates, stock market index, output and consumer price index). Furthermore, the chapter investigates empirically, using V AR systems, the existence of each channel in the changing financial environment are evaluated for aggregate data (all banks) and disaggregate data across five groups of banks (foreign banks, private banks, mixed banks, regional banks and state banks) by investigating their impulse responses, variance decompositions and accumulated effects. Our observation covers the period of January 1980 to December 2001. In order to capture the effect of financial deregulation which assumed to bring innovations in monetary policy and the effect of 1997 financial crisis, we divide the whole period into three sub period: Period 1 (1980:01-1988:12) in which captures the first 1983 financial deregulation; Period 2 (1988:01-1996:12) in which covers the second big 1988 financial deregulation; and Period 3 (1997:01-2001:12) which include the 1997 financial crisis. In Chapter 5, we examine the role of Non Performing Loans (NPL) in Indonesian monetary transmission mechanism following the methodology employed in Chapter 4. In general, the results, both in Chapter 4 and 5, indicate that monetary policy contraction is not effective in the short run (three months); In the long run (60 months), money is super-neutral as proposed by Friedman (classical view) for the whole observation; while the results across three periods indicates various results in the short-run. Based on the results in Chapter 4 and 5, we investigate further the way Indonesian monetary transmission operates by examining bank portfolio behaviour across five groups of banks (foreign, mixed, private, regional and state banks) in Chapter 6. This chapter focuses on the effect of monetary policy, third party funds and NPL in affecting Indonesian banks behaviour toward loans and other liquidity assets, such as Certificate Bank Indonesia (SBI) and inter bank call money for impact, interim and total effects. We employ a dynamic mean-variance expected utility approach that enables us to calculate the multiplier responses of the choice items to unit changes in exogenous variables. The multiplier effects involve three kinds effects: impact (current), interim (ensuing periods) and total (cumulative) multipliers. The econometric technique employed in the estimation of this chapter is Full Information Maximum Likelihood (FIML). The findings confirm that monetary policy has the greatest impact effects on the banks' portfolios. In regard to the interim effects, all three factors affect those portfolios. In the long run, however, the variable NPL has the greatest influence. Consequently, it can be suggested that Bank Indonesia has to set prudential regulations on, and introduce some stringent supervision of, the banks to reduce the hindrance to the transmission of its monetary policy.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available