MONETARY POLICY TRANSMISSION DYNAMICS IN INDONESIA: SVAR ANALYSIS OF INTEREST RATE, CONSUMER PRICE INDEX, AND INDUSTRIAL PRODUCTION INDEX
Keywords:
Consumer Price Index, Industrial Production Index, Interest Rate, SVAR, Taylor RuleAbstract
This study examines the monetary policy transmission dynamics in Indonesia by analyzing the dynamic relationship among Interest Rate (IR), Consumer Price Index (CPI), and Industrial Production Index (IPI) using the Structural Vector Autoregression (SVAR) approach. Grounded in Taylor Rule theory, the IR-CPI-IPI transmission chain is analyzed using monthly data from the Federal Reserve Bank of St. Louis (FRED) covering January 1995 to December 2019 (n=300 observations). Stationarity tests reveal that IR and IPI are stationary at first difference I(1), while CPI is stationary at level I(0). The exactly identified SVAR estimation with lag 2 yields a coefficient A2_1 = -0.0732 (p=0.034), confirming a significant negative contemporaneous effect of IR on CPI. Impulse Response Function (IRF) results indicate that the CPI response to an IR shock is initially positive (=0.2284 at step 0) but immediately reverses to negative at step 1 (-0.1471) through step 10, reflecting the demand-pull mechanism. The IPI response to IR shocks is weakly positive and statistically insignificant (A3_1=-0.0256, p=0.337). Forecast Error Variance Decomposition (FEVD) results confirm that IR contributes 5.50% to CPI variance and 2.53% to IPI variance at the 24-month horizon, with non-monetary factors dominating both CPI (92.79%) and IPI (83.83%) fluctuations. These findings indicate that price stability is the primary prerequisite for sustaining industrial sector activity in Indonesia, and that monetary policy must be complemented by robust supply-side policy support.
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