The Regional Impact of Monetary Policy in Indonesia

This paper employs vector autoregressive (VAR) models to measure the impact of monetary policy shocks on regional output in Indonesia. We find substantial cross-regional variation in policy responses in terms of both magnitude as well as timing. Our work adds to the existing literature by providing insights from a large developing country, viz. Indonesia, where monetary policy has both a national and a regional dimension. The results support previous findings that the differential regional effects of monetary policy are significantly related to sectoral composition (especially the share of manufacturing), providing evidence for the relevance of the interest rate channel of monetary policy. We also find that firm size contributes to these differences, providing evidence for the importance of the credit channel. As a whole, both types of channels appear to operate simultaneously in the decentralized Indonesian monetary policy and to impact on the real part of the regional economy. © 2014 Wiley Periodicals, Inc.