Degree Name

Doctor of Philosophy


Department of Economics


The objective of this study is to evaluate the reliability of banking and monetary aggregates as guide to the conduct of monetary policy. Banking aggregates i.e. savings mobilized through the banking system and credit aggregates are analyzed in accordance with searching altemative variables and providing more information needed to facilitate monetary policy.

This study found that the possible presence of stmctural breaks for banking and monetary aggregates occurred in response to the second phase of banking deregulation. With regard to the long mn relationships, this study confirmed the existence of stable long run equilibrium for all banking and monetary aggregates. However, for interest bearing aggregates i.e. savings, credit, modified narrow money and broad money, the stable equilibrium could only be achieved when applying the test procedures which allow for the presence of possible stmctural breaks. It implies that banking deregulation had more impact on interest bearing aggregates than on non interest ones. The latter, particularly currency and narrow money, are needed mainly to support fransactions, therefore they are less responsive to changes in interest rates which under a deregulated system were allowed to reach their market clearing levels.

The short run relationships particularly with respect to changes in interest rates display an interesting result. Even though interest rates were statistically significant in explaining the short mn variations of some interest bearing aggregates, however their magnitudes were considered too low to warrant a policy recommendation. In line with savings mobilization which has received considerable attention in the banking deregulation, since interest rates were not effective enough as a measure to stimulate savings, the policy should be more focused on building and maintaining public confidence in the domestic banks. With regard to the implementation of monetary policy, it suggests that indirect monetary instmments which work through affecting the price i.e. interest rates were not effective. Clearly, under a deregulated system, banking and monetary aggregates are less controllable.

Banking and monetary aggregates mostly did not perform well in predicting the future course of variables regarded to be the objectives of monetary policy particularly inflation and real income. Nominal currency performs more consistently and statistically significant in explaining the future course of inflation, both in the full sample and sub sample period. Meanwhile none of the banking and monetary aggregates could perform well in explaining real income, particularly in the post banking deregulation sub sample period.

Briefly, in the long run banking and monetary aggregates are mostly still reliable as a guide to undertaking monetary policy in Indonesia, provided that stable long run equilibrium for those aggregates and the specified variables still exist regardless of the impact of banking deregulation. However, in terms of relationship with the variables presumed to be the objectives of monetary policy or predictabihty and controllability aspects, currency and narrow money and modified narrow money emerge as the most sensible variables to guide for the conduct of monetary policy.

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Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.