An Ardl Approach to Identify Bank Landing Channel in Indonesia

Abstract

This paper tests whether the bank lending channel works in Indonesia. It develops an error correction representation of the Autoregressive Distributed Lag (ARDL) model of two bank credit markets. Each model takes account of one structural break associated with the 1998 financial crisis. The date of the crisis is determined by a unit root test that includes two structural breaks. Instead of Johansen’s cointegrating procedure, bounds test procedure is implemented. The estimated error correction model for both markets suggests that bank loans adjust more strongly towards loan supply, implying that monetary-induced disturbances in bank loans originate from the supply side. Keywords: bank lending channel, unit root, structural breaks