SVAR model of the Indonesian economy

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Economics and Finance, School of Business, La Trobe University, Bundoora.

This thesis consists of six related chapters on the application of Structural Vector Autoregression (SVAR) model to the Indonesian economy. Chapter 1 is an introductory chapter, providing the background and the objectives of the thesis. Chapter 2 describes the evolution of the Indonesian economy since early 1980's. Together with the description on the monetary authority institution and its conduct in the Indonesian economy, the material in Chapter 2 provides the necessary background to the empirical analysis in the subsequent chapters. Chapter 3 serves as the modelling background to the empirical models in Chapter 4 and Chapter 5 by providing a review on empirical macro-econometric modelling framework, especially VAR/SVAR model and its applications in Indonesia. This chapter also provides description on the data used in the empirical analysis in this thesis. Chapter 4 applies an SVAR model to the Indonesian economy to assess the dynamic impacts of external and internal shocks to the Indonesian economy. The overall result suggests that as a small open economy, the Indonesian economy is vulnerable to external shocks and that the domestic monetary policy alone is not sufficient to maintain domestic macroeconomic stability. Chapter 5 applies an SVAR model to investigate credit channel of monetary policy transmission in the Indonesia economy. The main result suggests a weak credit channel of monetary policy in the economy. Excess liquidity in the banking sector seems to be an important reason for the ineffectiveness of credit channel of monetary policy in the Indonesian economy. Chapter 6 concludes with a short summary of the thesis, general findings, possible policy implications and suggestions for further research.