Indra Suhendra
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The response of asset prices to monetary policy shock in Indonesia: A structural VAR approach
Banks and Bank Systems Volume 17, 2022 Issue #1 pp. 104-114
Views: 724 Downloads: 310 TO CITE АНОТАЦІЯThis paper aims to determine the effect of central bank monetary policy on financial asset prices in Indonesia from 1990 Q1 to 2020 Q4. Furthermore, this study measures the responses of three different asset prices: bond yield, stock price and exchange rate to central bank rate shocks using the structural vector autoregression model. The impulse response functions showed that tightening monetary policy in Indonesia appreciated the exchange rate in four periods, lowered stock prices in five periods, and increased bond yield in all periods. These results imply that an increase in monetary policy interest rate appreciates exchange rate, lowers the stock price, and reduces bond yield. The result of variance decomposition showed that the most dominant central bank rate prediction was in predicting forecast error variance of bond yield but the smallest in predicting forecast error variance of the exchange rate. These results corroborated the hypothesis that tightening monetary policy in Indonesia increases financial asset prices. It also highlighted the informational role of monetary policy interest rate in stabilizing financial asset prices.
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