The relationship between the financial sector and the real sector is very clear, especially during times of economic crisis in 2008. It gives economists an anticipation of a crisis in 2023, which might occur after the COVID-19 pandemic that has spread throughout the world. The COVID-19 pandemic has caused unpredictable shocks on the demand and supply sides; this certainly has the potential to have different policy effects from normal conditions. The existence of the global economic crisis shows that central banks have the duty to maintain price stability and be aware of systemic risks. In early 2020, Bank Indonesia implemented a Quantitative Easing (QE) policy in an attempt to mitigate COVID-19. QE is an unconventional monetary policy where central banks increase the money supply by purchasing government or private bonds after traditional monetary tools have been exhausted (Lu, 2013). However, systemic risks that may arise due to the policy also need to be taken into account whether it can prevent a crisis or become one of the triggers of the economic crisis. (Cobham & Kang, 2012) suggest that, in theory, with the flow of funds approach, a financial crisis would result in a decrease in banks' borrowing and aggregate demand. Then, with the QE policy, purchases of government bonds in the non-financial private sector by Bank Indonesia can increase non-financial private sector deposits and minimum mandatory demand deposits at the central bank.

This study aims to analyze the effectiveness of QE monetary policy in order to prevent the economic crisis that is predicted to happen in 2023 after the COVID-19 pandemic. The implementation of QE to stimulate the economy during a crisis or pandemic is considered an alternative in order to reduce the impact that may arise due to expansionary monetary policy. (Neely, 2015) stated that if QE can carry out its role effectively, it will be able to reduce currency exchange rates through several channels, including (1) liquidity channels; (2) expectation channels; and (3) portfolio-rebalancing channels. The low exchange rate can encourage exports, so real sector production and investment can also increase. However, (Aloui, 2021) points out that during the COVID-19 pandemic, QE policy did not have a significant effect on the exchange rate. This is because the crisis caused by COVID-19 has affected investor behavior in decision-making. Which is, it means the ineffective QE implementation can actually harm the economy, such as prolonged inflation and uncontrolled currency depreciation. Based on the data obtained from Bank Indonesia, the implementation of QE policy in Indonesia during the COVID-19 pandemic seems to be decreasing in line with the recovery of post-pandemic conditions. More details can be seen in Figure 1 below.

Based on Figure 1 above, we can see that total liquidity injected through QE policy to stimulate the economy during the COVID-19 pandemic (2020-2022) continues to decline as the pandemic and economic conditions improve. Several previous studies ((Kiley, 2018); (Indrajaya, 2022); (Retnasih & Herdianti, 2023)) have shown that the impact of QE policies on the economy is inconsistent. Some studies have shown that effective QE policies can maintain economic stability. However, other studies have proven that QE policies are nt effective enough, especially during the COVID-19 pandemic. Indonesia is one of the countries that implemented the QE policy during the COVID-19 pandemic. However, research on the effectiveness of this QE policy in Indonesia remains rare. Most of the studies on QE policy point to how it affects currency stability. In this study, therefore, we will focus on the impact of QE on maintaining economic stability in both the real and financial sector.

(Bedford et al., XXXX) explain that quantitative easing (QE) is the purchase of private or government assets using central bank money. (Shiratsuka, 2010); (Indrajaya, 2022); and (Olasehinde-Williams et al., 2023) show that QE policy is a non-conventional policy of the Central Bank to stimulate the economy by increasing the money supply through the purchase of securities from the private or government. Bedford et al. (2009) show that the purpose of QE policy is to provide an injection of money into the economy to generate nominal expenditure. This QE policy is issued to stimulate the economy if conventional monetary policy is deemed ineffective. This usually occurs when economic conditions are unstable due to shocks such as pandemics, natural disasters, wars, etc.

(Chen & Yeh, 2021) and (Fendel et al., 2021) proved that during the crisis caused by the COVID-19 pandemic, the European Central Bank (ECB) adopted a QE policy to overcome deflation, stimulate economic activity, loosen credit, and reduce the Euro exchange rate. Meanwhile, in the United States, (Stefański, 2022) discovered that QE can reduce unemployment primarily through increasing stock prices and reducing market volatility through Treasury purchases. Similarly, in the press release of the Financial System Stability Committee (KSSK) No. 1/KSSK/Pers/2022. It is explained that the policies adopted by Bank Indonesia to accelerate post-pandemic economic recovery consist of a low-interest rate policy, exchange rate stabilization, and a quantitative easing (QE) policy. Bank Indonesia injected liquidity into the banking industry in the form of SBN purchases, liquidity provision through term-repurchase agreement (repo) mechanisms, and lower minimum statutory demand deposits. The QE policy can be regarded as an alternative measure to stimulate the economy during the unstable economic conditions caused by a crisis. The transmission mechanism of quantitative easing application by the central bank can be seen in Figure 2 below.

(Solikin & Suseno, 2002) describe the money supply in a broad sense, which is often referred to as economic liquidity and is given the symbol “M2”. This money supply is defined as the obligations of the monetary system to the private sector, consisting of currency (banknotes and coins), demand deposits, and quasi-money. The implementation of the quantitative easing (QE) policy was carried out to increase the money supply through liquidity injection and credit easing. The amount of money supply in Indonesia over the past 5 years can be seen in Figure 3. From Figure 3, it can be seen that during the COVID-19 pandemic, the money supply continues to increase as long as the expansionary policies (including QE policy) are in place during the pandemic. During a crisis, the money supply usually tends to be high in line with government policies that want to stimulate the economy.

(Krishnamurthy & Vissing-Jorgensen, 2011); (Martin & Milas, 2012); and (Alekseievska & Mumladze, 2020) conducted research on the implementation of QE in the US during the economic crisis in 2008-2010 and found that QE policy works through several channels that have different impacts on certain assets, so it cannot focus solely on bond-rate policy targets. (Fawley & Neely, 2013) pointed out that the policies issued by the central bank during the financial crisis in 2007-2009 could not be effective. Developed countries such as Japan, the United Kingdom, the United States, and European countries respond with QE policies, so that central banks can respond effectively to the economic conditions (easing the credit conditions and providing liquidity injections) even though in the short-term the interest rates are close to zero. The financial crisis was felt again by all countries in the world during the COVID-19 pandemic in 2019.

(Fendel et al., 2021) analyze the impact of the COVID-19 announcement on monetary policy and fiscal policy by the European Central Bank (ECB) and the European Commission. They showed that the announcement of COVID-19 had a more dominant influence on government bond yields in developed countries such as Germany and the Netherlands. Apart from that, they also see that market conditions are very sensitive to national development during the COVID-19 crisis. This proves that the COVID-19 pandemic had a direct impact on economic conditions. (Cobham & Kang, 2012) examine the relationship between the financial crisis and quantitative easing with the money supply. They show that implementation of QE, which is when the central bank buys government bonds from the non-financial private sector, will increase the money supply (M2). (Montgomery & Volz, 2019) also proved that non-conventional monetary policy in Japan has a significant influence on the bank lending channel. Moreover, (Chen & Yeh, 2021) show that in the US, the implementation of QE during the COVID-19 pandemic was proven to increase investors’ confidence in the economy, besides that, the impact of QE policy on stock performance was more significant for industries affected by the pandemic. Meanwhile, in Indonesia, (Dinata & Oktora, 2020) proved that the QE policy has a negative and significant relationship to the rupiah exchange rate.

On the other hand, some previous studies proved that QE policy cannot be effective, especially during the crisis. (Cui & Sterk, 2018) show that QE intervention is a powerful tool for stabilizing output and inflation, but it comes with strong side effects on inequality. This evidence are consistent with (Woodford, 2016), who noted that QE increases financial stability risk but less than other policies. (Aloui, 2021) analyzed the QE policy and exchange rate in Europe using the TVP-BVAR-SP model and showed that QE policy did not have the expected effect on the exchange rate during the pandemic period because the COVID-19 pandemic changed investor behavior in decision-making. (Indrajaya, 2022) also shows that non-conventional monetary policy (QE policy) cannot be effective during the COVID-19 pandemic due to the credit crunch, which is a condition where banks are still hesitant to distribute credit to the public when the economic conditions are not stable yet due to the effects of the pandemic. It is necessary for policymakers to consider whether QE policies can effectively mitigate the risk of crisis during the pandemic or whether they will actually cause the economy to become more vulnerable to crisis in the short and long term. Therefore, this study was conducted to determine the effectiveness of QE policy to maintain economic stability in Indonesia during the COVID-19 pandemic. This study uses the Vector Error Correction (VECM) model to be able to see the relationships between QE policy and other monetary policy instruments towards economic stability indicators. Then, we conduct an Impulse Response Function (IRF) test to trace the shock of a variable against other variables during the observation period and future periods…

This study used quantitative analysis methods to analyze the relationship between quantitative easing monetary policy and macroeconomic variables. The data used in this study is secondary data obtained from an online database. These data were then analyzed using the Vector Error Autoregressive (VECM) model. The VECM model is employed to capture the volatility of the data and to determine the long- and short-run correlation between variables. In this study, we used dummy variables as a proxy for the existence of a quantitative easing policy. Variable CPI is used to show the price stability in the real sector, while IDX is used to present the stock price index as a financial market stability indicator. Meanwhile, macroeconomic variables associated with the QE policy in this study include the money supply (M0), the interest rate (IR), and the minimum reserve requirement (RR) during the research period. Data for each variable were obtained from Statistics Indonesia (BPS), CEIC, and the International Financial Statistics (IFS) database on the IMF’s official website. The research period used was the pre-COVID-19 pandemic until the post-COVID-19 pandemic, which is from January 2018 to December 2025. For more details, the variables used in this study can be described as follows.

The vector error correction (VECM) is often referred to as the restricted form of VAR. The model is used to analyze the relationship between variables in the time series data and analyze the impact of disturbance factors (shocks) in the model. VECM is applied when variables exhibit long-run equilibrium relationships (cointegration) while being non-stationary at their levels. Tabel 2 shows the comparison between VECM to standard VAR Models

According to Pesaran (2015) The VECM is a general model to accommodate cross-section cointegration and dynamic links between panel units. The VECM model can be used even if the data are not stationary at their levels. The VECM model can generally be formulated as follows:

Where is the r x 1 vector of cointegrating relations, also known as the long-run relations.

The VAR/VECM analysis process flow diagram used in this study can be seen in Figure 4 below.

The inflation rate is a macroeconomic indicator that shows the stability of the rupiah and is often used as a reference for measuring economic stability, especially when there is a crisis such as the COVID-19 pandemic, which started to hit Indonesia at the beginning of 2020. IRF test results show that the COVID-19 pandemic caused the inflation rate to have a high level of fluctuation, even though after the quantitative easing (QE) policy, the impact of the shock on the inflation rate was even greater. According to the Granger causality test result, we found that the implementation of QE policy through an increase in money base (M0) and a reduction in reserve requirement ratio significantly affects price level in the real sector (CPI) and stock prices (IDX). Therefore, the estimation results show that a decrease in the minimum reserve requirement can significantly increase inflation, and on the other hand, an increase in the RR can quickly reduce the inflation rate. This indicate that QE policy through RR reduction has the potential to cause an increase in inflation rate. These findings are in line with the results of the variance decomposition analysis, which show that inflation is more responsive to RR and QE policies than IR. We can conclude that maintaining price stability (inflation rate) in the long term is more effective using reserve requirements (RR) than interest rates (IR).

The composite stock price index (IDX) is often used as an indicator that shows stability in the financial sector. The findings from granger causality test indicate a statistically significant two-way reciprocal relationship between stock price (IDX) and M0. These findings prove that QE policies during the pandemic provided economic stimulus through M0 and stimulated stock market. Moreover, from the IRF test, the QE policy has been proven to reduce shocks to the stock price during the COVID-19 pandemic. Reducing shocks to the stock price means that the QE policy is effective in maintaining financial sector stability. This conclusion is strengthened by the results of the variance decomposition analysis, which shows that the most prominent external factor affecting the IDX was identified as shocks to QE policy. The stock price is highly responsive to the QE policy. So, we can conclude that QE policy during the estimation period is much more effective in stabilizing the financial market than the conventional monetary policy, such as the discount rate.

Based on the estimation results, we suggest that this QE policy should be used as a last resort in facing the post-pandemic crisis. Even though the QE policy was issued to provide stimulus to the economy and has been proven to be able to maintain the stability of the financial sector, it does not rule out the possibility that the systemic risks that might arise as a result of the QE policy are much greater. Therefore, to mitigate inflationary pressures resulting from the QE policy, the central bank can implement the Tapering Off (TO) policy, such as significantly increasing the minimum reserve requirements to control economic stability after the pandemic and keep risks that may arise as a result of QE under control.

This study still has many limitations; future researchers can develop the results of this research by adding other macroeconomic variables, such as the exchange rate and budget deficit policy which are also closely related to the implications of QE policy.

We would like to thank Universitas Muhammadiyah Surakarta for the financial support provided for this research. Special thanks to the journal editor and reviewers for their time, dedication, and valuable suggestions, which significantly improved the quality of this study.