Financial stability in the Indonesian monetary policy analysis

Abstract

AbstractFinancial stability is one of the main factors for a country’s economic sustainability nowadays. Financial instability has adverse effects on the economy which can lead to the financial crisis. This research tries to answer how monetary policy related to Indonesian financial stability in the short and long term, how specific the relations between its parts such as money supply, interest rate, and exchange rate to indonesian financial stability, and which one of these parts that have ways more effective to influence Indonesian financial stability. This research data use time series quarterly as quantitative data in Indonesia. By employing econometric models of error correction on quarter data that consist of the stationary stochastic process, long-run model and cointegration approach and error correction model, this model can indicate how quickly the effect of the money supply, interest rate or exchange rate is fully accepted by the financial stability in the short term. The finding of this study showed that the increase in interest rate began to be able to improve indonesian financial stability responsively in four times the period, namely an increase of one percent in interest rate could increase 0.4161 percent of financial stability in Indonesia.

Keywords

• financial stability
• money supply
• interest rate
• exchange rate
• error correction model
• E44