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Bank Lending Channel ofMonetary Transmission in Indonesia
Juda Agung
*
 Rita MorenaBambang PramonoNugroho Joko Prastowo
Directorate of Economic Research and Monetary Policy
BANK INDONESIA
2001
 _________________________ 
* The authors thank Hartadi A Sarwono, Perry Warjiyo, Sjamsul Arifin, Wibisono, and SriLiani Suselo for their consistent encouragement and thoughtful comments to thisstudy. Of course, any errors and ommisions are our responsibility. The findings andconclusions in this study are those of the authors and do not necessarily represent theviews of Bank Indonesia.
 
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Abstract
Using a battery of tests, the study investigates the existence of bank lending channel of monetary transmission in Indonesia before and after crisis.Aggregate evidence shows that a monetary policy is able to affect bank lending with a lag due to ability of banks to insulate the decrease in deposits byliquidating their securities holdings. Disaggregate evidence show that in the
aftermath of a monetary policy shock, there is a „flight to quality‟ of dep
ositsespecially from private domestic banks to foreign banks and state banks and
„flight to quality‟ of bank lending from individuals to firms. Results of panel data
estimation demonstrate that effect of monetary policy is stronger for low capitalbanks. Furthermore, survey on banks and firms support the econometric results.We also found that that efficacy of a monetary policy, particularly a monetarycontraction, in influencing the bank lending is stronger in the period of post crisisthan prior to the crisis. This findings lends support indirectly existence ofasymmetric effect of a monetary policy: the stronger in the recession than in theboom periods, stronger for low capital banks than low capital and for lesscreditworthy borrowers.
 JEL Classification: E44, E50Key words: bank lending channel, bank portfolio behaviour, monetarytransmission
 
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1. Introduction
Monetary policy in Indonesia is recently being faced with the mostchallenging time. The monetary policy to control high pressure of inflationand smooth out volatility of Rupiah exchange rate has been constrained
by banks and firms‟ financial restructuring process. Under such
circumstances when disintermediation of banking system takes place,efficacy of monetary policy has been declining and sometimes the policyis seen by many observers as costly.The problems have been aggravated by the uncertainty regardingthe way in which the monetary policy affects the real economy in theaftermath of the crisis. Attempts have been made to understanding themonetary policy implications of current the banking crisis. A study byAgung, et al (2001) to understand the existence of financialdisintermediation in the banking sector in the aftermath of the crisis and itsmonetary policy implications is one of the attempts. However, a broader agenda to understand the whole picture of monetary transmissionmechanism needs to be done. This agenda is of paramount as the fullimplementation of the inflation targeting framework requires a deepunderstanding on the work of the monetary policy in the economy bothin the short-run and long-run.This paper is a part of the research agenda on the monetarytransmission mechanism in Indonesia. In the recent years, a large bodyof literature has been developed on the efficacy of monetary policy andchannels through which the policy affects the real economy. Traditionally,monetary policy is believed to influence the economy through money or short-term interest rate which in turn affect the long term interest rate andcost of capital and thus investment. For example, in a monetary
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