Analysis of Conventional and Sharia Monetary Policies through Asset
Prices on Inflation in Indonesia
Julika Rahma Siagian
1
, Dede Ruslan
2
and Arwansyah
2
1
Post Graduate School, State University of Medan, North Sumatra, 20219, Indonesia
2
Department Economics, Faculty of Economics, State University of Medan, North Sumatra, 20219, Indonesia
Keywords: Sharia Monetary, Conventional Monetary, Error Correction Model (ECM)
Abstract: This study aims to analyze the transmission mechanism of monetary policy in Indonesia in controlling
inflation, both in terms of sharia and conventional terms. The data used in this empirical study is time series
data during 2011:1-2017:4 originating from Bank Indonesia and the Central Statistics Agency (BPS). The
analysis tool used is the Error Correction Model (ECM). This study analyzes the relationship between
independent and dependent variables both in the short and long term. The results of this study indicate that
from conventional monetary variable SBI (certifikat of bank indonesia) variables that have a positive and
significant effect on inflation in the long-term. Whereas in the short term the variable money supply has a
negative effect and variable interest rates on Bank Indonesia, bonds have a positive and significant effect on
inflation. In Islamic monetary variables, SBIS have a positive and significant effect on inflation in the long-
term. Islamic bond variables (Sukuk) have a negative and significant effect on inflation in the long-term.
While in the short-term the variable money supply, Islamic interest rates, and Islamic bonds have a positive
and significant effect on inflation.
1 INTRODUCTION
Monetary policy serves as a key to achieve
macroeconomic goals within a country. The
Government through the Central Bank as a monetary
policy aksekutor keep trying to regulate the amount
of money in circulation by trying to maintain the
stability of the value of money from various internal
and external factors. Those factors are not detached
from the steps of the Government in setting and
regulating interest rates, credit, asset prices, the
company's balance sheet, the exchange rate and
inflation expectations (Daniar, 2016).
To reduce the impact of the global economy jolts
to the economy in the country, it is a policy that is
effective and efficient, good monetary policy or
fiscal policy and other economic policies. The focus
of the implementation of monetary policy in
Indonesia according law No. 23-year 1999 amended
in Act No. 3 of the year 2004 concerning the
monetary policy of central bank Indonesia said that
given the dual mandate as monetary authorities that
can run conventional monetary policy as well as the
Sharia, then monetary policy that is using a dual
monetary policy i.e. conventional and Sharia with
the ultimate goal of monetary policy in Indonesia is
to achieve and maintain the stability of the value of
the the rupiah, that is the price (inflation) and the
exchange rate of the rupiah.
Based on the PMK No. 93/PMK. 011/2014
Target of inflation in 2016, 2017, and 2018 the date
21 may 2014 target for inflation set by the
Government for the period 2016 – 2018,
respectively by 4%, 4% and 3.5% respectively with
a deviation of ± 1%. (Bank Indonesia, 2018). As
seen in the graph below:
466
Siagian, J., Ruslan, D. and Arwansyah, .
Analysis of Conventional and Sharia Monetary Policies through Asset Prices on Inflation in Indonesia.
DOI: 10.5220/0009502304660472
In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 466-472
ISBN: 978-989-758-432-9
Copyright
c
2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
Figure 1: The growth of Inflation and actual
inflation target
According to Mishkin (1995), the transmission
mechanism of monetary policy is a complex process
because in theory of monetary economics is often
referred to as "Black box". This is because the
transmission is much influenced by three factors,
namely, the first change in the behavior of the
central bank, banking and economic actors in a
variety of financial and economic activity.
This research uses the variable bonds and Islamic
bonds (sukuk), asset prices as an indicator of
monetary policy through the asset price is a
monetary policy which will also affect the
development of the prices of other assets, whether
such financial asset price yield bond and stock
prices, as well as the physical assets of the particular
property and stock prices of gold. The influence of
price on the consumption of the asset investment
also would affect aggregate demand and will
ultimately determine the level of real output and
inflation in the economy (warjiyo, 2004).
As the Monetary Authority, Bank Indonesia will
usually accept and regulate the money supply to
stabilize the monetary economy of the country. A
stable money supply will hit the high inflation rate.
Open market operation as an indirect monetary
instruments can affect its operational objectives,
namely the interest rate or the amount of circulating
more effectively. By using the Certificates of Bank
Indonesia (SBI) as monetary instruments accounting
and Bank Indonesia Certificates (SBIS) Sharia as
monetary instruments. With Bank Indonesia
Certificate (SBI) and Bank Indonesia Certificates
(SBIS) Shariah-compliant central bank buying and
selling activities of securities with market
participants, both at the primary or secondary
markets that serve the main indirect operational
instruments monetary control.
Figure 2: The growth of Bank Indonesia Certificates
(SBI), Bank Indonesia Certificates sharia (SBIS),
bonds and Islamic Bonds (Sukuk), Year 2011 – 2014
in (billion)
Source: Bank Indonesia and the financial services
authority (OJK)
Based on the above graph shows the trend of the
decline in the value of the SBI from year 2011 until
2014. Carried out in respect of article IBPA
(Indonesia Agency) 2015, SBI tends to decline
because the flow of funds banking on SBI receding
more in line with the direction of the monetary
policy of the central bank, where BI is deliberately
reducing the absorption of funds through the SBI in
order to the Bank is funneling more enterprising
credit so that it will have an impact on the rupiah
exchange rate remained stable. If the Fund's bank in
SBI, BI has to accumulate increasingly bear the
brunt of an increasingly large flowers.
Policies that central banks do so showing the
value of SBIS decreases and SBIS increases, keep
paying attention to the amount of money in
circulation is also increasing every year. In addition,
the development of assets such as bonds and Islamic
bonds (sukuk) continues to increase, which means it
can be said that investment with assets such as this
demand by investors.
Like the previous explanation of inflation which
remained persisted each year greatly affect the
amount of money in circulation. Where in the year
2011 the money supply amounted to 2,877,220
Billion while in the year 2014 growing money
supply followed by high inflation in that year
reached 8.36% with the amount of money floating
Analysis of Conventional and Sharia Monetary Policies through Asset Prices on Inflation in Indonesia
467
around 4,170,731 billion. This greatly influenced the
development of the price of other assets such as the
SBI in 2012 and 2014 is declining while the SBIS in
2014 rising high in the follow with the development
of conventional bonds and Islamic bonds.
2 THEORICAL FRAMEWORK
The transmission mechanism of monetary policy is a
process where a policy can affect economic growth
and inflation in a country, the transmission channels
of monetary policy is carried out through six
channels namely interest rates, credit, the company's
balance sheet, assets prices, exchange rates and
expectations.
According to Dornbusch, et al (2004), the
monetary policy affects the economy, first, by
influencing interest rates then affect aggregate
demand. The increase in the money supply lower
interest rates, increasing investment spending and
aggregate demand, and therefore increase the
equilibrium output.
Indonesia began to adopt the dual banking
system after the banking policy issued in 1998 Act
No. 10 of the double-banking, (Dahlan Slamat,
2005:407). The dual banking system is the
application and enforcement of this two banking
systems (conventional or public bank system that
operates with the flowers and the banks that operate
with the Sharia system side by side), which
generally also not limit of conventional commercial
banks in providing Islamic services through
mechanisms of islamic window by first forming the
Syariah Business Units (UUS).
Specifically, Taylor, 1995 (in Warjiyo, 2004)
stated that the mechanisms of monetary transmission
to bijakan is “the process through which monetary
policy decision are transmitted into changes in real
GDP and inflation”. This means that the
transmission Mechanism of monetary policy is the
paths traveled by the monetary policy to be able to
influence the final target of monetary policy, namely
national income and inflation.
Monetary policy through the price of the asset
can be via two channels i.e. channel wealth (the
wealth effect) and Tobin-q (Mishkin: 1955). Lines
of wealth (the wealth effect) affects the level of
consumption, and consumption affect aggregate
demand, aggregate demand and further affect the
output gap and ultimately affect the rate of inflation.
Asset prices through the channels on the Tobin-q
will affect the level of investment and the impact on
aggregate demand and ultimately influence the
inflation rate. In this context, the channel-a channel
that gives the stress on the transmission mechanism
of monetary policy is Tobin's theory and the
influence of wealth (the wealth effect) of
consumption. Through Tobin's q theory, if q is
defined as the relative market value of companies-
companies that can purchase a variety of fixtures by
simply issuing equities, and vice versa.
The role of asset price in the transmission
mechanism of monetary policy is known
theoretically, though difficult to illustrate
empirically. Monetary policy shocks results in
fluctuations in the price of assets with monetary
policy can boost stock prices in two ways namely by
making equities relatively more attractive for bond
and an improvement in the Outlook for corporate
earnings as a result of spending more households.
Thobin q theory describes the mechanism of
monetary policy in a manner affecting the economy
through its impact on equity valuations. (Asif Idres
et al, 2005)
According to Edward and Khan (1985) there are
two types of factors that determine the value of the
interest rate i.e. the internal and external factors.
Internal factors include the national income, the
amount of money in circulation, and inflation. While
the external factor is the foreign interest rate and the
rate of foreign currency exchange rate changes are
expected. (Neny Erawati,2002:99)
The mechanism works BI Rate until affect
inflation is often referred to as the transmission
mechanism of monetary policy. The mechanism
describing the actions of Bank Indonesia through the
vicissitudes of monetary instruments and operational
targets affecting various economic and financial
variables before ultimately influential to the end goal
of inflation. (Bank Indonesia, 2015).
3 RESEARCH METHOD
This study uses secondary data runtun time (time
series) in the form of a monthly period January
2011-December 2017. This research was conducted
to look at variables-variables that affect the
transmission of conventional monetary policy and
asset prices through Sharia. Variables-variables that
will be scrutinized is the SBI, SBIS, money supply,
bonds, Islamic bonds (Sukuk) in Indonesia. Data
obtained from Bank Indonesia (BI) and the financial
services authority (OJK).
The estimation model used in this study is the
analysis of dynamic model with the regression that
is by using the model of error correction (Error
Correction Model/ECM) Domowitz and granger. In
the context of Economics, dynamic model
specification is very important because it deals with
UNICEES 2018 - Unimed International Conference on Economics Education and Social Science
468
the establishment of the model of the economic
system that is associated with the change in time
both short term and long term. This study uses
statistics programs help E-views Version 9.0..
4 ANALYSIS
4.1 Stationeritas Test
The first thing to do is to examine whether the data
is stationary or not. This Stasioneritas test needs to
be done because a regression analysis should not be
did when the data used is not stationary and
normally if it still done the resulting equations then
are a spurious regression.
4.1.1 Unit Root Test
A variable is said to be stationary if the mean value,
variance, and kovariansnya always constant at any
point in time. There are some proper ways can be
done to measure the existence of stasionaritas, one
of them is by using the Dickey Fuller (DF), i.e. If
the absolute value larger than his statistics DF Mc
Kinnnon Critical Value (depending on the level of
selected beliefs 1%, 5%, or 10%), then it can be
inferred that such data stationary. In this research a
critical value used was 5% which is not too low and
not too high.
Table 2: Unit Root Test Results
Variables
Value
ADF
Critical
Value
McKinnon
(α = 5%)
Description
INF -1.095811 -2.976263 Non
Stationary
MS -3.893595 -2.976263 Stationary
SBI -2.638140 -2.981038 Non
Stationary
BONDS -2.403553 -2.976263 Non
Stationary
SBIS -2.638140
-2.981038
Non
Statioary
ISLAMI
C
BONDS
(SUKUK)
-1.497680
-2.976263
Non
Stationary
4.1.2 Integration Test
A test of the degree of integration is a continuation
of the test unit and the roots are only required when
all the data has not been stationary at zero degrees or
1. A test of the degree of integration used to know at
how data will be stationary. When the data have not
been stationary at one, then testing must remain
continued until each variable is stationary. This test
is used to perform test Dickey Fuller (DF). Which
table II explained that a variable (MS) on the level
of the stationary level. Whereas in variable INF,
SBI, BONDS, ISLAMIC BONDS (SUKUK) on the
stage level not stationary then performed a test of the
degree of intergrasi.
Table 3: Integration Test Results
Variables
Value
ADF
Critical
Value
McKin
non (α =
5%)
Description
INF -3.797454 -2.981038 Stationary
MS -6.646262 -2.981038 Stationary
SBI -2.595987 -2.981038 Non
Stationary
OBL -2.981038 -2.082098 Non
Stationary
SBIS -1.132217 -2.981038 Non
Stationary
SUKUK -6.589875 -2.981038 Stationary
Table 4: Integration Test Results
Vari
ables
Valu
e ADF
Critic
al Value
McKi
nnon (α =
5%)
Descrip
tion
INF -
5.089589
-3.004861 Stationa
ry
MS -
9.099494
-2.986225 Stationa
ry
SBI -
4.525525
-2.986225 Stationa
ry
OBL -
3.476526
-2.986225 Stationa
ry
SBIS -
3.466009
-2.991878 Stationa
ry
SUKUK -
4.579899
-3.004861 Stationa
ry
4.1.3 Cointegration Test
In this research to test the residual method based on
Granger test. Residual-based test methods using
Analysis of Conventional and Sharia Monetary Policies through Asset Prices on Inflation in Indonesia
469
statistical tests Augmented Dickey-Fuller (ADF)
regression by observing the rest of Granger was
stationary or not. The value of this residue will be
tested using the test Augmented Dickey-Fuller
(ADF) to find out whether the value of the
remaining stationary or not. The results of this
research show that the value of the ADF tests
estimated > Critical Value α = 5% (-4.612624 >-
2.981038). So it can be concluded that the empirical
model used in this study are eligible to test Granger.
Table 5: Cointegration Test Results
Va
riables
Value
ADF
Critica
l Value
McKin
non (α =
5%)
Ket
ECT -4.612624 0.0012 Stasion
ary
4.2 Estimation Error Correction Model
(ECM)
Table 6: The Results of The Estimation of the Error
Correction Model (ECM) Short-Term
Indep
endent
Variables
Coefficient
t-
Statistic
Pro
b
D(Ln
MS)
-
5.089649
-
2.752699
0.01
56
D(LnS
BIS)
3.6585
54
4.0321
25
0.00
12
D(LnS
UKUK)
-
0.493542
-
4.528430
0.00
05
ECT
1.2872
58
6.0022
74
0.00
00
C
0.3357
69
1.1666
29
0.26
28
R-squared
Adjusted R-
squared
F-statistic
Prob(F-
statistic)
Durbin-
Watson stat
0.904034
0.869760
26.37686
0.000001
2.179223
Equation Error Correction Model (ECM) for
long-term periods are as follows:
On the table are able to be known that the
estimation of sharia monetary policies where MS,
SBIS, and short-term variable are significant
affected. Where MS is negative and significant
influence of inflations as also for SUKUK
variables. Only the SBIS is positive and significant
influence on Indonesia’s inflation.
Table 7: The Results of The Estimation of Error
Correction Model (ECM) Long-Term.
Independ
ent
Variables
Coefficient t-Statistic Prob
D(LnMS) -0.056966 -1.020440 0.3181
D(LnSBIS
)
1.108118 3.0605074 0.0055
D(LnSUK
UK)
-0.409202 -2.063630 0.0505
C 4.251129 2.601117 0.0160
R-squared
Adjusted R-
squared
F-statistic
Prob(F-
statistic)
Durbin-
Watson stat
0.433574
0.359692
5.868482
0.003958
0.685553
Table 8: The Results of The Estimation of the Error
Correction Model (ECM) Short-Term
Independen
t Variables
Coefficient t-Statistic Prob
D(LnMS) -2.642198 -3.116654 0.0071
D(LnSBI) -0.064296 -3.045324 0.0082
D(LOBLIG
ASI)
-0.439834 -1.973081 0.0672
ECT 0.938950 5.140962 0.0001
C 0.714068 3.788115 0.0018
R-squared
Adjusted R-
squared
F-statistic
Prob(F-
statistic)
Durbin-
Watson stat
0.756959
0.675946
9.343614
0.000335
1.834620
Table 9: The Results of The Estimation of Error
Correction Model (ECM) Long-Term.
Independent
Variables
Coefficien
t
t-Statistic
Pro
b
D(LnMS) -2.642198 -3.116654
0.16
17
SUKUK
SBISMSn
493542.0
658554.3089649.5575499.5INFL
UNICEES 2018 - Unimed International Conference on Economics Education and Social Science
470
D(LnSBI) -0.064296 -3.045324
0.02
81
D(LOBLIGA
SI)
-0.439834 -1.973081
0.13
75
C 0.938950 5.140962
0.02
16
R-squared
Adjusted R-
squared
F-statistic
Prob(F-
statistic)
Durbin-
Watson stat
0.367696
0.285221
4.458297
0.013102
0.602493
4.3 Test Determination (R
2
)
4.3.1 F-Test (Simultaneous Test)T
F test or simultaneous test is conducted to see the
effect of independent variables simultaneously or
together on the dependent variable. From the results
of the model estimation for inflation in the short
term, the calculated F value is 26.37686 with a
probability level of 0.000001. Then the variable is)
the money supply (MS), sbi and sbis and bonds and
sukuk in the short term which have a simultaneous
significant effect on inflation (INF) in Indonesia.
From the results of the model estimation for
inflation in the long run, the Fcount value is
7.664799 with a probability level of 0.001429. Then
the variable is the money supply (MS), sbi and sbis
and bonds and sukuk in significant simultaneous
inflation (INF) in Indonesia.
5 RESULTS
5.1 Influence of The Money Supply on
Inflation in Indonesia
According to Adiwarman (2010), the concept of
money in the economy of islam is different with the
concept of money in the economy. In economics, the
concept of money is very clear and definite that
money is money, money is not the capital. On the
contrary, the concept of money expressed in
conventional economic generalized back and forth,
namely money as money and money as capital.
Based on the estimation of the long and short
term of the dual policy, the money supply has a
significant negative effect on the short term with a
probability value of> 0.05%. Whereas in the long
run both monetary and sharia monetary policies have
no significant effect. This is in line with Keynes's
theory that increases in the money supply can
increase prices, but the increase in money supply is
not always proportional to the increase in the price
of goods.
5.2 Influence Of Sbi And SBIS On
Inflation In Indonesia
The fact is that in this variable, the SBI and SBI
influence inflation in the long and short term
estimates for both conventional and sharia monetary
policies both have a negative and significant effect.
This identifies that variable inflation is strong in
influencing sharia variables, that is, except for sharia
policy rate variables or Indonesian bank sharia
certificates (SBIS), and conventional SBI variables.
On the channel of asset prices through Tobin-q
will affect the level of investment and have an
impact on aggregate demand and ultimately affect
the inflation rate. The problem is how monetary
policy changes equity prices. If monetary policy
takes place contractively, members of the public will
get the fact that they have less money to spend.
Furthermore, an increase in interest rates causes the
cost of holding money more expensive,
consequently (cateris paribus), the acquisition of
deposits is greater than equity, consequently the
company's market value decreases. Thus the
company's ability to carry out an expansion is
experiencing congestion, investment is down, and
economic growth stops. This situation will suppress
the output gap, thereby reducing inflation.
5.3 Ifluence of Obligasi and Obligasi
Syariah (sukuk) on Inflation in
Indonesia
Through the estimation of the error correction
model, it is known that the two double monetary
variables in the SUKUK variable sharia monetary
policy have a significant negative effect on inflation
in Indonesia through the asset price path both long
term and short term with a probability value>
0.05%. Whereas in conventional monetary policy
the asset price variable asset path in the short term
has a significant negative effect, the long-term
estimation of this variable reverses the previous
estimation results because it does not affect inflation
in Indonesia.
Monetary policy influences the development of
prices of other assets, both the price of financial
assets such as bond yields and stock prices, or the
price of physical assets, especially the price of
Analysis of Conventional and Sharia Monetary Policies through Asset Prices on Inflation in Indonesia
471
property assets and gold. This transmission occurs
because the investment of funds by investors in their
investment portfolios is not only in the form of
deposits in banks and other instruments in the rupiah
and foreign exchange money markets, but also in the
form of bonds, shares, and physical assets. Thus,
changes in interest rates and exchange rates as well
as the amount of investment in the rupiah and
foreign exchange money markets will also affect the
volume and price of bonds, shares and physical
assets.
6 CONCLUSIONS
Based on the description stated, it can be concluded
that in the short term the speed of transmission of
monetary policy in conventional banks is relatively
stronger compared to monetary policy in Islamic
banking. Inflation is more influenced by variables in
conventional banking. Most of the influence of
inflation is influenced by SBI which in the long and
the short term has a negative and significant effect
while the MS variable has negative and significant
influence and the BONDS has a significant negative
effect on the short term while the long term is not
significant in the transmission of monetary policy.
For variables sharia, which has a big effect on
inflation and the effectiveness of a policyMonetary
is influenced by SBIS variables. The implications of
SBIS are increasing investment community in
banking sharia, SBIS will go up and aggregate
demand rises, then people's income will grow. Then,
monetary policy for 'inflation reduction' with a
pattern Sharia is more effective than pattern
Conventional.
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