The Effectiveness of Monetary Policy Instruments in Supporting The Financing of Agribusiness Sector in Indonesia

Abstract An important part of Indonesia’s economy is agricultural sector. The industry has consistently demonstrated its ability to withstand several economic downturns. The monetary policy framework is expected to encourage stability in agricultural sector. Therefore, the goal of this research is to ascertain the relationship between monetary policy and the funding of Indonesia’s agricultural sector from 1990 to 2023. Using the Vector Error Correction Model (VECM) approach, this study investigates the relationship between monetary policy variables, such as interest rates, exchange rates, and the money supply, and the GDP of the agribusiness sector, which includes agriculture, livestock, forestry, and fisheries. The study’s conclusions indicate that while interest rates and exchange rates have a long-term effect on financing Indonesia’s agricultural sector, the money supply has a short-term negative impact and the exchange rate has a short-term positive one. These results demonstrate that monetary policy significantly affects funding for agribusiness. These results highlight the value of monetary policy and agribusiness sector development working together to boost the resilience and expansion of the national economy. The study’s results emphasize the necessity of a monetary policy framework that can adapt to the demands of the agribusiness industry and the significance of tight coordination between monetary authorities and agricultural players. Monetary policy optimization can therefore promote innovation, boost agribusiness’s competitiveness globally, and act as a catalyst for the industry’s sustained growth.