Title:
MONETARIST VS KEYNESIAN APPROACH IN THE MONETARY POLICY TRANSMISSION MECHANISM BEFORE AND AFTER THE IMPLEMENTATION OF THE INFLATION TARGETING FRAMEWORK IN INDONESIA

Authors:
Ahmad Fauzi Abdurrohman, Lukman Hakim, Dwi Prasetyani, Indonesia

Abstract:

This research was conducted to determine how effective the quantity channel (monetarist approach) and the interest rate channel (Keynesian approach) are in transmitting monetary policy in achieving the final target of monetary policy, namely inflation before and after the implementation of the Inflation Targeting Framework in Indonesia. This research was conducted in the period before the application of the Inflation Targeting Framework (1997-2008) and after the implementation of the Inflation Targeting Framework (2009-2020) using the Vector Error Correction Model (VECM) method. The lag length criteria test shows that the quantity channel before and after the application of the Inflation Targeting Framework has a lag of 3 months and the interest rate channel has a lag of 2 months. Meanwhile, the results of the variance decomposition of the Inflation Targeting Framework show that the interest rate channel is more effective in transmitting monetary policy. The final conclusion of this research is that the interest rate channel is more effective in transmitting monetary policy before and after the implementation of the Inflation Targeting Framework in Indonesia.