ENERGY PRICE SHOCKS AND BANKING LIQUIDITY: EVIDENCE FROM MONETARY TRANSMISSION DYNAMICS IN INDONESIA

Abstract

This study investigates the integrated monetary transmission mechanism in Indonesia by linking external shocks, inflation dynamics, monetary policy instruments, and banking liquidity within a unified (VECM) Vector Error Correction Model framework. Using monthly data as of 2018 to 2024, the analysis incorporates exchange rate movements, money supply, and fuel prices as determinants of inflation, while examining the role of inflation in shaping policy responses through Minimum Reserve Requirements (GWM) and the BI 7-Day Repo Rate (BI7DRR), and their subsequent impact on the Loan-to-Deposit Ratio (LDR). The results indicate that fuel price shocks exert a significant and persistent long-run impact on inflation, which subsequently influences monetary tightening. Interest rate adjustments significantly reduce banking liquidity in both the short and long run, while reserve requirements serve as a complementary stabilization instrument. The conclusion emphasizes the prominence of energy-driven inflation in transmitting macroeconomic shocks to banking intermediation and financial stability in emerging economies.