The response of asset prices to monetary policy shock in Indonesia: A structural VAR approach

  • Received August 2, 2021;
    Accepted February 14, 2022;
    Published March 25, 2022
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/bbs.17(1).2022.09
  • Article Info
    Volume 17 2022, Issue #1, pp. 104-114
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This 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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    • Figure 1. Exchange rate responses to monetary policy shocks
    • Figure 2. Stock price responses to monetary policy shocks
    • Figure 3. Bond yield responses to monetary policy shocks
    • Table 1. Descriptive statistics
    • Table 2. Unit root tests
    • Table 3. Variance decomposition of the exchange rate
    • Table 4. Variance decomposition of the stock price
    • Table 5. Variance decomposition of bond yield
    • Conceptualization
      Indra Suhendra
    • Data curation
      Indra Suhendra
    • Formal Analysis
      Indra Suhendra, Cep Jandi Anwar
    • Investigation
      Indra Suhendra, Cep Jandi Anwar
    • Methodology
      Indra Suhendra
    • Software
      Indra Suhendra
    • Writing – original draft
      Indra Suhendra, Cep Jandi Anwar
    • Writing – review & editing
      Indra Suhendra, Cep Jandi Anwar
    • Funding acquisition
      Cep Jandi Anwar