Examining US Monetary Spillover to Indonesian Local Currency Government Bonds in Volatile Periods

Publication | May 2023

Changes in US monetary policy can affect the yield of Indonesian local currency government bonds.

We analyze the magnitude of the United States (US) monetary policy spillover on the Indonesian local currency government bond yield, particularly when the Federal Reserve (Fed) implemented the quantitative easing (QE), tapering off, Fed fund rate (FFR) normalization, and quantitative tightening over the past decades. Understanding the global economic dynamics, such as changes in US monetary policy, can be a critical policy input to mitigate risks in the Indonesian economy, particularly in anticipating the monetary normalization policy amid COVID-19 uncertainty. Changes in US monetary policy in the form of tapering off, increasing the FFR, and quantitative tightening as an external phenomenon can affect the yield of Indonesian local currency government bonds. 

Using the generalized autoregressive conditional heteroskedasticity method, we found that changes in US monetary policy through the portfolio balance and confidence channels have a significant effect in increasing Indonesia’s local currency government bond yield, particularly during the 2013 monetary policy normalization and 2020 pandemic QE period. 

In addition, Indonesia’s local currency government bonds also experienced persistent volatility in the observed period, particularly during the 2008 global financial crisis, the 2013 tapering off, and the 2017–2019 quantitative tightening. Volatility occurred at different levels in each period, with the volatility during the pandemic QE being the lowest compared to the other periods. This lower volatility was mainly due to the combination of lower foreign ownership in the government bond market and a fiscal-monetary policy mix to recover the economy (including the debt monetization policy). From a fiscal perspective, an increase in government bond yield volatility leads to a higher cost of funds, which puts pressure on Indonesia’s state expenditure. This reflects the risk that the debt, particularly government bonds, may eventually become too expensive to service and may shrink the fiscal space for funding national development initiatives.


Additional Details

  • Economics
  • Finance sector development
  • Governance and public sector management
  • Indonesia