Causality of Dual System Monetary Policy to Inflation in Indonesia

Abstract

The paradigm shift from a conventional economy to an Islamic economy has encouraged the development of Islamic finance. This development will change the direction of monetary policy, in which the Islamic monetary magnitude will more or less affect the achievement of inflation in the economy. This research aims to identify the causality of dual system monetary policy with inflation in Indonesia during the observation period. The research method used is descriptive quantitative. The data used are monthly data from January 2016 to November 2020. This study uses secondary data published by Bank Indonesia, OJK, BPS, and various literature that will be used to answer research questions. VECM is used to answer the causality between dual system monetary policy and inflation. From the model estimation results, it is found that there is only a one-way relationship between the dual system monetary policy (SBIS) and inflation. However, the cointegration test results show that there is a cointegration relationship between the dual system monetary policy variables and inflation. This indicates that the dual system monetary policy tends to short-term and long-term relationships.