FINANCIAL DEREGULATION AND THE BANK LENDING CHANNEL IN DEVELOPING COUNTRIES: THE CASE OF INDONESIA
Abstract
The dominant role of commercial banks as a source of finance and the considerable asymmetry of information in financial markets in developing countries have raised an argument that the bank lending channel of monetary transmission mechanism would be very important in such countries. This study addresses the issue by investigating empirically whether there are differential effects of monetary policy on banks’ balance sheets, and its implications to the existence of the bank lending channel of monetary policy in Indonesia, especially since the early 1980s when the government adopted a policy of financial deveculation. We find significant differences of balance sheet behavior across bank clashes in response to a change in monetary policy, consistent with the predictions of the bank lending view. We also found that because of access to foreign funds and the existence of bank loan commitment, the monetary policy was unable to constrain loan supply by the large (state) banks, indicating that the bank lending channel operates through smaller (non-state) banks.
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References
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Peek, J. and E. Rosengren, 1995, Is Bank Lending Important for the Transmission of Monetary Policy? Conference Series No. 39, Federal Reserve Bank of Boston.
Ramey, V., 1993, How important is the credit channel in the transmission of monetary policy? Carnegie-Rochester Conference Series on Public Policy, Dec., pp. 1-45.
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Sundararajan, V. and L. Molho, 1988, Financial Reform and Monetary Control in Indonesia. IMF Working Paper WP/88/4. International Monetary Fund, Washington.
Thornton, D. L., 1994, Financial innovation, deregulation and the “credit view” of monetary policy. Federal Reserve Bank of St Louis Economic Review, January/February, pp. 31-49.
World Bank, Various issues, World Debt Tables.
Bank Indonesia, 1996, Report for the Financial Year 1995/1996. Bank. of Indonesia, Jakarta.
Bank Indonesia, 1992, Report for the Financial Year 1991/1992. Bank of Indonesia, Jakarta.
Bank Indonesia, Indonesian Financial Statistics, (various issues).
Bank Indonesia, Commercial Bank Monthly Report, (various issues).
Bank Indonesia, 1995, Manual for Monthly Report of Commercial Banks in Indonesia Weekly Report of Bank Indonesia.
Bernanke, B., 1993, How important is the credit channel in the transmission of monetary policy? A comment. Carnegie-Rochester Series on Public Policy, December, pp. 47-52.
Bernanke, B. and A. S. Blinder, 1988, Credit, money and aggregate demand. American Economic Review, June 1983, pp. 257-276.
Bernanke, B. and A. S. Blinder, 1992, The federal funds rate and the channel of monetary transmission. American Economic Review, September, pp. 901-921.
Bemanke, B., M. Gertler and S. Gilchrist, 1996, The financial accelerator and the flight to quality. Review of Economics and Statistics, February, pp. 1-15.
Boediono, 1994, Problems in implementing monetary policy in Indonesia. In Mc Leod, Ed., lndonesia Assessment 1994, Finance as a Key Sector in Indonesia’s Development. Research School of Pacific and Asian Studies, Australian National University.
Callen, T. and P. Reynolds, 1996, Capital Market Development and Financial Deregulation in Thailand and Malaysia: Implications for Financial Structure and the Monetary, Tratismission Mechanism. Paper presented in the Conference on Macroeconomic Issues Facing ASEAN Countries, Jakarta, 7-8 November 1996.
Cecchetti, S. G., 1995, Distinguishing theories of the monetary transmission mechanism. Federal Reserve Bank of St Louis Economic Review., May/June, pp. 83-100.
Christiano, L. J., M. Eichenbaum and C. L. Evans, 1996, The effects of monetary policy shocks: Evidence from the flow of funds. Review of Economics and Statistics, 78, pp. 16-34.
Cole, D. and B. 5. Slade, 1996, Building a Modern Financial System: The Indonesian Experience. Cambridge University Press, Cambridge.
Dale, 5. and H. Haldine, 1994, Interest rates and the channel of monetary transmission: Some sectoral estimates. European Economic Review, 39, pp. 1611-1625.
Doan, T., 1992, RATS Users’s Manual. Estima, Evanston, Illinois.
Doornik-, J. A. and D. Hendry, 1995, PcFIML: Interactive Econometric Modelling of Dynamic System. International Thomson Publishing, London.
Enders, W., 1995, Applied Econometric Time Series. John Wiley and Sons, New York.
Folkerts-Landau, D., G. J. Scinasi, M. Cassard, V.K. Ng, C. Reinhart and M. Spencer, 1995, Effect of capital flows on the domestic financial sectors in APEC developing countries. In M. S. Khan and Carmen M. Reinhart, Eds., Capital Flows in the APEC Region, IMF Occasional Paper No. 122, March.
Gertler, and S. Gilchrist, 1993, The role of credit market imperfections in the monetary transmission mechanism: Arguments and evidence. Scandinavian Journal of Economics (951), pp. 43-64.
Gertler M. and S. Gilchrist, 1994, Monetary policy, business cycles and the behavior of small manufacturing, firms. Quarterly Journal of Economics, May, pp. 309-340.
Glen, J. and B. Pinto, 1994, Debt or Equity? How Firms in Developing Countries Choose. World Bank, International Finance Corporation Discussion Paper No. 22.
Hadad, M. D., 1996, Bank Behavior in a Changing, Regulatory Environment: Study of Indonesia. 1983-1993. Unpublished thesis, University of Monash.
Harris, J. R., F. Schiantarelli and M. G. Siregar, 1995, The effect of financial liberalization on the capital structure and investment decisions of Indonesian manufacturing establishments. World Bank Economic Review, 8, pp. 17-47.
Himmelberg, C. P. and D. P. Morgan, 1995, Is bank lending special? In J. Peek and E. S.Rosengren, Eds., Is Bank Lending Important for the Transmission of Monetary Policy? Federal Reserve Bank of Boston, Conference Series No. 39, June.
Hoshi, T., A. K. Kashyap and D. Scharfstein, 1991, Corporate structure, liquidity and investment: evidence from Japanese panel data. Quarterly Journal of Economics, 106(1), pp. 33-60.
Hubbard, R. G., 1995, Is there a “Credit Channel” for monetary policy? Federal Reserve Bank of St Louis Economic Review, May/June, pp. 63-77.
Kashyap, A. K. and J. C. Stein, 1995, Impact of monetary policy on bank balance sheets. Carnegie Rochester Series on Public Policy, June, pp. 151-195.
Kashyap, A. K. and J. C. Stein, 1997, What Do a Million Banks have to say about the Transmission of Monetary Policy? NBER Working Paper No. 6065.
Linblad, J. T., 1997, Survey of recent developments. Bulletin of Indonesian Economic Studies, 33(3), pp. 3-33.
Marshall, K., 1994, Competition and growth: chances in Indonesia’s banking sector since 1988. Journal of Asia Business, 10(3).
McLeod, R., 1994, Ed., Indonesia Assessment 1994: Finance as a Key Sector in Indonesia’s Development. Research School of Pacific and Asia Studies, Australian National University, Canberra.
McMillin, D. W., 1996, Monetary policy and bank portfolio. Journal of Economics and Business, 45 (2), pp. 111-127.
Meltzer, A., 1995, Monetary, credit and other transmission processes: a monetary perspective. Journal of Economic Perspectives, Fall, pp. 49-72.
Nasution, A., 1994, Banking sector reform in Indonesia, 1983-1993. in Mc Leod, Eds., Indonesia Assessment 1994, Finance as a Key Sector in Indonesia’s Development, Research School of Pacific and Asian Studies, Australian National University, Canberra.
Peek, J. and E. Rosengren, 1995, Is Bank Lending Important for the Transmission of Monetary Policy? Conference Series No. 39, Federal Reserve Bank of Boston.
Ramey, V., 1993, How important is the credit channel in the transmission of monetary policy? Carnegie-Rochester Conference Series on Public Policy, Dec., pp. 1-45.
Romer, C. D. and D. Romer, 1990, New evidence on the monetary transmission mechanism. Brookings Papers on Economic Activity (1), pp. 149-213.
Sims, C. A., 1980, Macroeconomics and reality. Econometrica, 48, pp. 1-48.
Sims, C. A., 1992, Interpreting the macroeconomic time-series facts: the effects of monetary policy. European Economic Review, 36, pp. 975-1011.
Stiglitz, J., 1994, Government, Financial Markets, and Economic Development. NBER Working Paper, No. 3669.
Strongin. S., 1995, The identification of monetary policy disturbances: explaining the liquidity puzzle. Journal of Monetary Economics, 35, pp. 463-497.
Sundararajan, V. and L. Molho, 1988, Financial Reform and Monetary Control in Indonesia. IMF Working Paper WP/88/4. International Monetary Fund, Washington.
Thornton, D. L., 1994, Financial innovation, deregulation and the “credit view” of monetary policy. Federal Reserve Bank of St Louis Economic Review, January/February, pp. 31-49.
World Bank, Various issues, World Debt Tables.
Published
2003-10-11
How to Cite
Agung, J. (2003). FINANCIAL DEREGULATION AND THE BANK LENDING CHANNEL IN DEVELOPING COUNTRIES: THE CASE OF INDONESIA. Buletin Ekonomi Moneter Dan Perbankan, 3(1), 121-145. https://doi.org/10.21098/bemp.v3i1.290
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
