THE IMPACT OF EXCESS LIQUIDITY ON MONETARY POLICY

  • M. Barik Bathaluddin Bank Indonesia
  • Nur M. Adhi P. Bank Indonesia
  • Wahyu Ari Wibowo Bank Indonesia
Keywords: Excess liquidity, Threshold VAR, monetary policy transmission mechanism

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

 

 

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Published
2012-03-30
How to Cite
Bathaluddin, M. B., Adhi P., N. M., & Wibowo, W. A. (2012). THE IMPACT OF EXCESS LIQUIDITY ON MONETARY POLICY. Buletin Ekonomi Moneter Dan Perbankan, 14(3), 245-267. https://doi.org/10.21098/bemp.v14i3.404
Section
Articles