THE IMPACT OF MONETARY POLICY TOWARD INDONESIAN STOCK MARKET UNDER INFLATION TARGETING REGIME
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Authors:
• Maria PRAPTININGSIH, email: maria_npa@yahoo.com, Afiliation: Department of Business Management, Faculty of Economics, Petra Christian University, Surabaya, Indonesia -
Keywords: inflation targeting framework, monetary policy, stock market, vector error correction, variance decomposition
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Abstract:
A high volatility in stock market movement can be influenced by current news both domestic and international economic shocks, including the ongoing global financial crisis that affect Indonesian economy in particular. Based on empirical studies and theories, that monetary policy can be an effective tool in order to stabilize the stock market volatility. Monetary policy can have a significant effect on the movement in stock market. Does it really happen on Indonesian macro economy? This paper investigates the relations between monetary policy by its instruments and stock market movement. Our empirical evidence is based on before and after the adoption of Inflation Targeting Framework, including the period of Asian Crisis (1997) and the Global Financial Crisis (2008). This paper uses a Vector Error Correction Model (VECM) in order to examine the dynamic movement and changes on Indonesian Stock Market as an impact of the changes in monetary policy in terms of Inflation Targeting regime. Utilizing an Impulse Response and Variance Decomposition approach, this paper analyzes the effectiveness of monetary policy toward the stock market performance in order to achieve the stability of stock market and to develop market expectations. These objectives are beneficial to strengthen the credibility of the Central Bank as the monetary authority in terms of the implementation of Inflation Targeting Framework. Furthermore, this paper attempt to assess and evaluate the monetary policy and induce the central bank to create an optimal policy in the future.