Non-Core Liabilities and Monetary Policy Transmission in Indonesia During the Post-2007 Global Financial Crisis

Abstract

The policy importance of non-core liabilities has risen to prominence in recent years with the studies of Shin and Shin (2010), Hahm, et al., (2010) and Hahm, et al., (2013) highlighting it as a useful indicator of financial procyclicality and vulnerability. In this paper, we look at non-core liabilities in relation to its role in the transmission of monetary policy, particularly by examining how the interest rate channel of monetary policy is affected by non-deposit liabilities. We analyse this issue in the context of an emerging economy experience of Indonesia, which in recent years, has seen an increased reliance of its banking sector on non-core funding. Our investigation employs available bank-level data on non-core liabilities and lending rates in Indonesia over the period October 2011 to July 2016. We find that including non-core liabilities in the estimation has an effect, relative to the baseline, of stronger overall and immediate pass-through, albeit with a more sluggish adjustment towards correction of disequilibrium in the next period. The overall effect is that non-core liabilities make the duration lengthier for the monetary policy rate to transmit to bank lending rates in Indonesia.

Keywords: non-core liabilities, lending rates, policy rates, interest rate channel, monetary policy transmission, dynamic panel

JEL Classification: C33, E43, E52, G21