Dual Monetary Transmission and Real Sector Dynamics: Comparative Evidence from Islamic and Conventional Policies in Indonesia

Malik Shahzad Shabbir (Sunway University, Sunway City, Malaysia)
Riyan Damara Putra (Universitas Islam Negeri Raden Intan Lampung, Indonesia)

Journal of Islamic Finance and Economic Studies
Vol. 2 No. 1 (2026): Journal of Islamic Finance and Economic Studies

Background: Indonesia’s dual monetary system combines Islamic and conventional financial mechanisms within a common macroeconomic environment, yet the two channels may transmit monetary impulses to the real sector through different adjustment processes. Understanding these differences is important because transmission effectiveness depends not only on immediate responses but also on persistence, equilibrium adjustment, and relative contribution to output fluctuations. Aims: This study examines and compares the dynamic transmission of Islamic and conventional monetary channels to Indonesia’s Industrial Production Index (IPI). Methods: Quarterly data from Q1 2018 to Q4 2022 were analyzed using a Vector Error Correction Model (VECM), complemented by Impulse Response Function (IRF), Forecast Error Variance Decomposition (FEVD), and Granger causality analysis. The empirical system incorporates SBIS, PUAS, Islamic financing, SBI, PUAB, conventional credit, inflation, exchange rate, and IPI. Results: The VECM produced a negative and statistically significant error correction term of −0.340, indicating that approximately 34% of disequilibrium was adjusted within one quarter. In the short run, SBI and SBIS rates were negatively associated with IPI, whereas PUAS, PUAB, Islamic financing, and conventional credit showed positive associations. The reported IRF patterns indicate that conventional credit generated a faster but less persistent response, while Islamic financing exhibited a more gradual and sustained adjustment. FEVD results further show that conventional credit accounted for the largest reported share of IPI variation, followed by Islamic financing and PUAS. Conclusion: The findings indicate complementary but asymmetric transmission within Indonesia’s dual monetary system, with Islamic and conventional channels differing in response speed, persistence, and relative contribution to industrial activity. The study contributes to dual monetary transmission literature by demonstrating that comparative effectiveness should be assessed across multiple dynamic dimensions rather than through a single measure of transmission strength.