Indonesia Conference Directory

This paper analyzes the effect of macroeconomic indicators, including Gross Domestic Product (GDP), inflation, Bank Indonesia interest rates (BI rates), Jakartas composite stock index, exchange rates and crude oil prices) on the performance of commercial banks in Indonesia. We use the Vector Error Correction Model (VECM) on monthly banking data from 2012-2018 and obtain several research findings. First, the impulse response function shows the greatest response to the banks efficiency performance which is proxied by the BOPO ratio due to the influence of shocks in the macro economy; The author believes the volatility of this bank efficiency indicator represents the inefficiency of commercial banks in Indonesia. Second, based on the analysis of variance decomposition, ROA and NPL provide the weakest response to macroeconomic shocks. Third, the author believe the application of Bank Indonesia interest rates as an effective monetary instrument according to result of study that Bank Indonesias interest rate shocks generally provide the biggest response from most bank performance indicators.