COVID-19 and Quantitative Easing in Indonesia: Evidence from the VECM Model
Keywords:
Quantitative Easing, VECM model, COVID-19Abstract
Introduction/Main Objectives: This study was conducted to determine the effectiveness of Quantitative Easing (QE), which has been carried out by Bank Indonesia since early 2020, to mitigate the impact of COVID-19. Background Problems: The application of quantitative easing to stimulate the economy during a crisis or pandemic is considered an alternative to reduce the impact that may arise due to expansionary monetary policy. However, systemic risks that may arise as a result of the QE policy also need to be considered. Policymakers need to consider whether the QE policy can prevent the crisis or whether they will actually cause the economy to become more vulnerable to crisis. Novelty: Several previous studies have shown that an effective QE policy can maintain the exchange rate stability, but other studies have also proven that the QE policy is not effective enough to use during the COVID-19 pandemic. Indonesia is one of the countries that implemented the QE policy during the COVID-19 pandemic. However, research regarding the effectiveness of this QE policy in Indonesia is still rare. Research Methods: This study used time series data from January 2018 to December 2025, which was analyzed using the Vector Error Correction Model (VECM). Finding/Results: The results of this study show the different impacts of QE policies on price stability in the real sector and stock price stability in the financial market. We found that QE policy through RR reduction has the potential to cause an increase in the inflation rate. However, these findings also prove that QE policies during the pandemic provided economic stimulus through M0 and reduced shocks to the stock price to maintain financial market stability. Conclusion: Therefore, to mitigate inflationary pressures resulting from the QE policy, we suggest the central bank 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.
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