By Hylmun Izhar
Abstract:
This paper aims to examine the monetary transmission mechanism in terms of controllability and reliability of monetary policy in dual banking system, namely conventional and Islamic banking systems in the case of Indonesia. The paper investigates the long run relationship as well as short run dynamic equilibrium for the period 2001 to 2004.
Empirical results show that monetary aggregates in Islamic banking system are more controllable than in conventional banking system. In addition, monetary policy in Islamic banking system is less reliable than that of conventional one, as it is not statistically connected to the main goal of monetary policy. It implies that Islamic banking in Indonesia has not been able to significantly respond to the developments in monetary policy nor do they significantly contribute to economic development. This may be explained due to the relatively small size of the Islamic financial sector.
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