The Effect of US Monetary Policy Normalization Toward The Financing Growth of Indonesian Islamic Banking Industry: Short-Term and Long-Term Approaches

Ahmad Mikail, Kenny Devita Indraswari


The study identifies the effect of The Fed Fund Rate (FFR) normalization toward the financing growth of Islamic banks as well as toward the industrial credit growth in Indonesia. To acquire better understanding about the effect of the increasing FFR, Vector Error Correction Model is being utilized in order to identify short run and long run effects. The data employed are the quarterly data of total credit in banking industry, total financing in Islamic banking industry, FFR, real GDP growth, real interest rate, exchange rate and Indonesian composite index from 2003 - 2015. To forecast the dynamic effect of the rising FFR towards financing growth in the Islamic banks, Impulse Response Function is being applied. The result from the long run estimation suggests that the Fed’s monetary policy has negative effect toward the Indonesian banking credit growth as well as the Islamic financing growth. Moreover, the estimated coefficient shows that the effect is quite low in the long run for the conventional bank and relatively high for the Islamic banks. From the short run dynamic analysis, the study reveals that the Islamic banks financing growth is mostly determined by FFR where Islamic financing growth affects Indonesian composite index and real interest rate. However, the Impulse Response Function result exhibits that the Fed’s monetary policy normalization will not affect Islamic banks financing in Indonesia.

Keywords: Fed Fund Rate, Financing Growth, Islamic Banking, Indonesia, Monetary Policy

Full Text:



Arsana, I.G.P. (2005). Pengaruh Nilai Tukar terhadap Aliran Kredit dan Mekanisme Transmisi Kebijakan Moneter Jalur Kredit. Jurnal Ekonomi dan Pembangunan Indonesia, 5(2), 121 – 140.

Bekhet, H.A., & N.Y.M. Yusop. (2009). Assessing the Relationship between Oil Prices, Energy Consumption and Macroeconomic Performance in Malaysia:Co-integartion and Vector Error Correction Model (VECM) Approach. International Business Research, 2(3), 153-175.

Calvo, G. A., Leonardo L., & Carmen M. R. (1993). Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors. Staff Papers (International Monetary Fund), 40(1),108 – 151.

Canova, F. (2005). The Transmission of US Shocks to Latin America. Journal of Applied Econometrics, 20, 229–251.

Dahlhaus, T., & Garima V. (2014). The Impact of US Monetary Policy Normalization on Capital Flows to Emerging-Market Economies. Bank of Canada Working Paper, 53.

Dornbusch, R. (1985). Policy and Performance Links between LDC Debtors and Industrial Nations. Brookings Papers on Economic Activity, 2, 303–68.

Engle, R. F., & C.W.J. Granger. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(22), 251 – 276.

Ergec, E.H., & B.G. Arslan. (2011). The Impact of Interest Rate on Islamic and Conventional Banks: The Case of Turkey. MPRA Paper No. 29848.

Giovani, J., & J. C, Shambaugh. (2006). The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime”. IMF Working Paper, WP/06/37.

Guo, K., & V, Stepanyan. (2011). Determinants of Bank Credit in EMEs. IMF Working Paper, 11/51.

Ibrahim, M. H., & M.E. Shah. (2012). Bank Lending, Macroeconomic Conditions and Financial Uncertainty: Evidence from Malaysia. Review of Development Finance, 2, 156 – 164.

Kassim, S.H., M. Shabri Abd. Majid., and Rosylin Mohd Yusof. (2009). Impact of Monetary Policy Shocks on the Conventional and Islamic Banks in a Dual Banking System: Evidence from Malaysia. Journal of Economic Cooperation and Development, 30 (1), 41-58.

Khan, A. (1985). Adjustment Mechanism and Money Demand Function in Pakistan. Pakistan Economic and Social Review, 2, 257 – 261.

Kim, S. (2001). International Transmission of US Monetary Policy Shocks: Evidence from VAR’s. Journal of Monetary Economics, 48, 339 – 372.

Masih, A.M.M., & R. Masih. (1996). Empirical Test to Discern the Dynamic Causal Chain in Macroeconomic Activity: New Evidence from Thailand and Malaysia based on a Multivariate Cointegration/Vector Error-Correction Modelling Approach. Journal of Policy Modelling, Vo 18(5), 531-560.

Mukhtar, Tahir., & S. Rasheed. (2010). Testing Long Run Relationship between Exports and Imports: Evidence from Pakistan. Journal of Economic Cooperation and Development, Vol. 31(1), 41 – 58.

Naveed, M. Y. (2015). Impact on Monetary Policy Shocks in a Dual Banking System in Pakistan: A Vector Auto Regressive Approach. European Academic Research, II (11),14684-14700.

Tan, T. B. P. (2012). Determinants of Credit Growth and Interest Rate Margins in the Pihilippines and Asia. IMF Working Paper, 12/123.

Zaheer, S., S. Ongena., & Sweder J.G. van Wijnbergen. (2013). The Transmission of Monetary Policy through Conventional and Islamic Banks. International Journal of Central Banking, 9(4), 175 – 222.


  • There are currently no refbacks.