Interest rate transmission illustrates the degree and speed of market adaptation to changes in interest rate policies set by the central bank. The transmission of interest rates is one of the prerequisites for the transmission of monetary policies to action through interest rates. This model is still considered the best model to explain the transmission of interest rates from policy rates to bank rates (Egert et al, 2006).
Marotta (2007) examined the structural breaks in the pass-through of interest rates from policy rates to bank lending rates and the process of euro unification. Kobayashi (2008) analyzed the incomplete pass-through of interest rates in the euro area and the optimal monetary policy. The results of interest rate pass-through using the standard ECM method for some countries are shown in Table 3.
Correspondingly, the speed of adjustment of the interest rate pass-through also varies across countries.
Islamic Monetary Transmission Policy
In the short term, the pass-through deposit is equal to or greater than the pass-through loans. In the longer term, the pass-through deposit is equal to or less than the pass-through loans. Most empirical studies show that the level of pass-through deposits corresponds to the level of pass-through loans in the short and long term.
The setting of contemporary Islamic financial institutions is not much different from the framework of conventional financial institutions, which is why the Islamic monetary policy instruments are also similar to the instruments of the conventional one. Since both systems have similar and also different instruments, the Islamic monetary policy transmission may be similar or different from the conventional one. Where IP is industrial production index, IF is Islamic finance, ID is third-party fund collected in Islamic bank, and ONIGHT is overnight interbank rate representing monetary policy.
The same framework was carried out by Ascarya (2010) for the case of Indonesia to determine the transfer of monetary policy to the ultimate goal of monetary policy (namely economic growth hand stability of the money) via financing channel in Islamic banking. Where IPI is industrial production index, CPI is consumer price index, IFIN is Islamic bank financing, IDEP is third party financing or funds in Islamic bank and PUAS is interest rate of Islamic interbank money market. In addition, Ayuniyyah, et.al.(2010) investigated the multiple transmission of monetary policy in Indonesia to grow the economic growth.
The conventional model of interest rate transmission (Egerti, 2006) was modified to form an Islamic model of interest rate transmission policy. Where α is the transition parameter for one period and β is the adaptation speed of the transition.
METHODOLOGY
Data and Variables
The data used in this study are monthly time series data in the period January 2003 to September 2009, obtained from SEKI, DSM and DPbS Bank Indonesia. SBISSBISSBISSBISSBISttttt ::::: Islamic policy rate, using SWBI bonus and SBIS fee (since April 2008), obtained from Statistics of Islamic Banking and DSM-BI. PLSPLSPLSPLSPLSttttt ::::: The rate of profit and loss sharing for financing (Musharaka + Mudharabah) in Islamic banking, obtained from the Directorate of Islamic Banking BI.
Each endogenous variable is explained by its own lag, current value of other endogenous variable, and the lag of other endogenous variables. The primitive form is called the structural VAR, and the standard form is called VAR. To overcome the shortcoming of first-difference VAR and to recover long-term relationships between variables, we can use Vector Error Correction Model (VECM), as long as these variables are co-integrated.
17) (18) a is the long-term coefficient, b is the short-term coefficient, λ is the error correction parameter, and the expression in parentheses indicates co-integration between the variables y and z. The matrixΩΠ can be decomposed into two matrices of dimensions (n x r); ΩΠ = λβT , where λ is the alignment matrix and β is the co-integration vector, whereas r is the co-integration rank. The first test is the unit root test to determine if the data is stationary or trending.
Without cointegration, the innovation account would not be meaningful for the long-run relationship between variables. With the presence of co-integration, we can apply the VECM model at the data level to obtain the long-term relationships between variables. Within this condition, the innovation that takes into account the VAR level and the VECM will be meaningful for long-term relationships.
RESULTS AND ANALYSIS
Granger Causality
OUTPUT
SBIS
Impulse Response Function
The results of the Impulse Response Function (IRF) for the output models of the transmission of the dual monetary policy show that all the conventional variables, namely credit ( LOAN ), interest ( INT ), interbank money market ( interbank ) and the policy rate ( SBI), are consistently lower. production. Interest rates in conventional systems have the largest negative impact on output, while Islamic finance (FINC) has the largest positive impact on output. For the inflation model (CPI), the Impulse Response Function shows that apart from the SBI rate, all conventional variables including loan volume (CREDIT), interest (INT) and interbank money market (PUAB) give inflationary impact in inflation forever.
The effect of the shock of conventional variables on the fall in inflation and stable after the period 8-21, while the effect of the shock of Islamic variables on the fall of inflation slightly faster and stable after the period 9-19. Among conventional variables, lending rate (INT) has the largest negative impact (trigger) on inflation, while Islamic profit and loss sharing (PLS) has the largest positive impact (reduces) on inflation. Since credit is affected by its interest rates while financing is affected by its profit sharing, lending has a negative impact on inflation and output, while Islamic financing has a positive impact on inflation and output.
Since the PUAB rate as a benchmark for the conventional bank rate has a negative impact on inflation and output. Meanwhile, the effects of a shock (rise) in the SBI can affect (hold) inflation, but at the same time also have a negative impact on output. SBI impact on inflation is the premise of conventional economics to use the SBI as the main monetary tool in controlling inflation.
However, it should be noted that the negative impact of the other three conventional variables (PUAB, and LOAN INTEREST) is much greater than the positive effect of SBI on inflation. When the interest rate increased, investment would decrease, so that output would also decrease. Meanwhile, when the profit sharing increased, investment would also increase, so that production would also increase.
Forecast Error Variance Decomposition
This pattern also applies to the conventional interbank rate (PUAB) and Islamic interbank yield (PUAS). In addition, Islamic monetary policy (SBIS) showed similar behavior with other Islamic variables; reducing inflation and stimulating production. The effect of interest rates and inflation is in line with the results of empirical studies by Ascarya (2009a and 2009b), where interest rate is one of the causes of inflation, while profit sharing does not trigger inflation.
The effect of interest rate and profit sharing on production was in accordance with Ryandona (2006) and Ascarya et.al. 2007), where interest rates had a negative effect on production or economic growth, while profit sharing had a positive effect on production or economic growth. For the transmission of dual monetary policy with a final inflation target (CPI models), the forecast error variance decomposition (FEVD) shows that the conventional variables with the largest negative contribution or trigger of inflation are interest (25.23%), credit volume or LOAN (19:43% ) and interbank money market (1.87%), except SBI, which contributes positively (inhibitors) to inflation with 1.52%. Meanwhile, Islamic variables make a positive contribution in terms of inflation suppressor, although still small, such as PLS (4.63%) and FINC (1:31%).
The results indicate that the conventional variables are generally inhibitors, while Islamic variables are the driving force for economic growth. In total, these conventional variables contributed negatively to economic growth by 31.29%, while the Islamic variables contributed positively to economic growth by 1.62%. Meanwhile, to achieve price stability or inflation, the conventional variables generally cause inflation, while the Islamic variables contain it, except for SBI (conventional), which contributes 1.52% to curb inflation.
For inflation targeting, the contribution of conventional variables to trigger inflation is 46.53%, while the Islamic variables contain inflation with a contribution of 6.21%. The above results generally show that the conventional variables (mainly financial sector variables) naturally lead to inflation and restrain economic growth, while the Islamic Policy Rate variables (mainly real sector variables) naturally do not trigger inflation while encouraging economic growth. SBI's behavior of curbing inflation is consistent with conventional monetary policy, but promotes inflation through an increase in lending rates and hampers economic growth.
CONCLUSION
This is consistent with the proposed strategy of Choudhury (1997), Ascarya, etal. 2007) and Ascarya and Shakti (2008); (ii) the price approach can still be used, but using the real rate of return as a policy rate, so it can be applied to both conventional and Islamic policies. 2008), Ascarya (2009) and Ascarya and Yumanita (2009), so monetary policy is not only to control inflation but also to eradicate inflation; (iii) in accordance with points (i) and (ii), then SBIS should use the profit-sharing contract (or musharakah mudharabah), instead of the fee basis (ju'alah), to give better effects in macroeconomic stability and reducing inflation.
Interest rate transmission in Greece: Did EMU cause a structural break?Δ Journal of Policy Modeling No.28 pp.453-466. Interest rate transmission in the Polish banking sector and bank-specific financial concerns.ΔΔMimeo. Transition of interest rates in the new EU member states: The case of the Czech Republic, Hungary and Poland. William Davidson Institute Working Paper No. 671 May.
Retail Bank Interest Rate Pass-Through: New Evidence at the Euro Area Level.Δ European Central Bank Working Paper Series No.136 April. Interest rate pass-through in Central and Eastern Europe: Reborn from simply going away? ΔΔWilliam Davidson Institute Working Paper No.851 November.
