Evaluating the Effects of a Dual Monetary System on Wealth Inequality in Indonesia
Eko Kurniawan, Tika Widiastuti, Hesti Eka Setianingsih

Department of Sharia Economics, Faculty of Economics and Business, Universitas Airlangga

Abstract

This study examines the impact of Indonesia^s dual monetary system, which includes both conventional and Islamic monetary policies, on wealth inequality. Using a Vector Error Correction Model (VECM) and using semi-annual data from 2011 to 2022, the analysis shows significant differences in terms of how each policy framework affects wealth distribution. In the short run, conventional monetary policy tends to worsen wealth inequality, driven by a rapid rise in stock prices - mainly benefiting wealthy households - while wage growth of low-income households remains sluggish. In contrast, Islamic monetary policy shows different findings, with stock prices responding negatively and wages showing a positive trend, thus indicating its potential to reduce wealth inequality. The Islamic monetary approach, with its emphasis on the real sector, encourages investment, job creation and real wage growth, which collectively contribute to a fairer distribution of wealth. These findings are important for Bank Indonesia to consider to further explore and potentially expand the application of Islamic monetary policy to foster a more inclusive and equitable economic environment

Keywords: Conventional Monetary Policy, Sharia Monetary Policy, and Inequality in Indonesia

Topic: Monetary economics