The time-varying impact of US monetary policy spillovers on small open economies: Evidence from Indonesia

Saba Ndayezhin Danladi () and Aliyu Sanusi

Asian Journal of Economics and Empirical Research, 2024, vol. 11, issue 1, 30-43

Abstract: This study examines the impact of the US monetary policy spillover on Indonesia’s macroeconomic and financial variables using quarterly data for the period 2000–2020 for both domestic and US variables. The study uses a Bayesian form of a time-varying parameter (TVP) vector autoregressive (VAR) model with stochastic volatility to look at how real GDP, inflation, the exchange rate, the stock market return, and the monetary policy rate react to a shock in US monetary policy. We find that US monetary policy spillovers, on average, boost Indonesia’s real GDP, stock market returns, and bilateral exchange rate vis a vis the US Dollar but also trigger domestic inflation beyond what Indonesia’s policy reaction could counteract. However, there are significant differences between the variables' responses to easing and tightening shocks, on the one hand, and conventional vs. unconventional monetary policy, on the other. Finally, we found substantial time variation corresponding to major global events, including the Global Financial Crisis and implementation of unconventional monetary policy, the taper tantrum of 2013–2014, and the severe lockdown in the wake of the COVID-19 pandemic in 2019–2020. These findings underscore the importance for policymakers in Indonesia to closely monitor and anticipate the impact of US monetary policy spillovers on domestic macroeconomic variables. This knowledge can inform more effective policy responses and risk management strategies to safeguard economic stability and promote sustainable growth.

Keywords: Indonesia; Macroeconomic variables; Monetary policy spillover; Small open economy; Time-varying VAR; US. (search for similar items in EconPapers)
Date: 2024
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