Essays on The Impact of Monetary Policy on Regional and Sectoral Economies in Indonesia
In literature, it is difficult to find the answer on how the monetary policy affects the regional economies and sectoral industries. In the partial equilibrium framework, most of the studies are only focused on some region and particular sector in a region. This is because of the lack of data availability. Moreover, the development of the general equilibrium framework using Computable General Equilibrium (CGE) and Dynamic Stochastic General Equilibrium (DSGE) are concentrated on the national level model. Only a few researchers produce disaggregated model using these methods. It happened because introducing sectoral and regional dimension into general equilibrium framework makes the model much more complicated and hard to solve. Given this situation, this dissertation attempts to narrow the gap in the literature by building comprehensive tools to analyze the impact of the monetary policy to regional economies and industries that can help policymakers especially central bank as a monetary authority to come out with a policy recommendation. In this study, the scope of monetary policy is limited to the interest rate policy as the primary instrument that is used by the central bank. This dissertation consists of three essays on different issues and various methods to address the issues. However, the bottom line is similar, namely the impact of the monetary policy on the regional and sectoral economies in Indonesia. The dissertation introduces the sectoral and regional dimension into the model which can create comprehensive tools for policy analysis as mentioned before. As a starting point, in the first chapter, the sectoral investment equations are developed using dynamic panel estimator suggested by Arellano and Bond to analyze the determinants of sectoral investment and also the impact of real interest rate to the sectoral investment. Moreover, this chapter also estimates the aggregated national investment as a benchmark and then compares the weighted elasticity parameters of real interest rate between those models to show how the results are different in every sector. It found that the weighted real interest rate coefficients between the aggregated national investment equation and the sectoral investment equation are quite different. According to the sectoral investment model, the most affected sector by the change in real interest rate is Non-Oil and Gas Manufacturing sector instead of Oil and Gas Manufacturing sector as obtained from aggregated national investment model. Thus, the policymakers should use the real interest rate estimate from sectoral investment equations instead of the coefficient from aggregated investment one to avoid the misleading policy recommendation. The second chapter aims to build a comprehensive model for analyzing the impact of shocks and/or policies not only national economy but also the regional economy in more detail for every sector in the economy. The model is called Financial Computable General Equilibrium (FIRCGE) model. In addition, this paper also analyzes on how central bank as a monetary authority and government as a fiscal authority should coordinate in order to achieve specific objective given the specific shocks. Moreover, this study wants to compare the effectiveness of the combination of interest rate and different fiscal stimulus rule, which are an untargeted fiscal stimulus and a targeted fiscal stimulus. In this experiment, the FIRCGE model is able to generate an iso-loss curve that might be useful for both central bank, and government in providing the possible combination of fiscal stimulus and interest rate based on the objective or loss function that they choose. It found that in Indonesia, the combination of targeted fiscal stimulus and interest rate is more efficient than the combination of untargeted fiscal stimulus and interest rate in the loss function which has neutral weight on both inflation and GDP stability. The third chapter aims to construct five region DSGE models, estimates the optimal monetary policy and then analyzes how the central bank should react to the regional shocks. In addition, this chapter tries to address the question of how disaggregation of the national model into the regional model is necessary. This study found that currently, the monetary policy reaction function in Taylor rule is not optimal. The central bank of Indonesia did not react optimally to the regional shocks given the objective function. It also demonstrated that disaggregating national model into regional model would lead to better performance in term of the loss function. Thus, it suggested that the policymakers should use the disaggregated regional DSGE model if they are dealing with the regional shocks in order to get the optimal policy response.
Monetary Policy; CGE; DSGE; Dynamic Panel; Fiscal Policy; Regional; Regional studies
Donaghy, Kieran P.
Kanbur, Ravi; Mansury, Yuri S.
Ph. D., Regional Science
Doctor of Philosophy
dissertation or thesis