The Impacts of Globalization on Inflation andTransmission of Islamic Monetary Policy: Case Study in Indonesia

Abstract

This Research aims to examine the implications of globalization for the nature of domestic inflation in Indonesia and to measure how far the influence to the Islamic monetary policyand how Islamic Monetary Policy deal with it. Specifically, whether the role played by each channel in the monetary policy transmission weakened or strengthened is investigated. To achieve these objectives a dynamic factor model with stochastic volatility (DFM-SV)model of the Indonesian monetary economy is constructed. However, before these objectives are addressed the issue of whether the monetary policy shocks have plausible macroeconomic effects is dealt with. To that end, a nonrecursive identifying strategy is applied.Time series econometric methods such as cointegration test, Granger causality test and generalized impulse response functions are applied in examining the dynamic relationship of the variables. Keyword: globalization, inflation, volatility, Islamic monetary policy