Government Fund Transfers and Banking Spillovers: Evidence from Indonesia

Abstract

This study aims to analyze the spillover effects of government fund transfers from the central bank to the State-Owned Banks Association. The method employed in this study is the Inter-Regional Input-Output approach. The six provinces simulated in this research, selected based on the Sensitivity Index and their contribution to the national economy, are Jakarta, West Java, East Java, Central Java, Banten, and North Sumatra. The first simulation, with fund placement in Jakarta, resulted in an increase in total national economic output. However, the output growth in this simulation was the lowest compared to simulations in the other five provinces (East Java, West Java, Central Java, Banten, and North Sumatra). The highest increase in national output was observed in the fourth simulation (Sim04), corresponding to fund allocation in Central Java. Regarding inter-provincial spillover effects, Jakarta was among the lowest spillover contributors compared to the other five provinces, whereas Banten was the highest. The findings also indicate a backwash effect, whereby Jakarta absorbs more spillover effects from surrounding regions than it transmits. Therefore, a policy that concentrates fund placement solely in Jakarta should be reconsidered in favor of a more proportionate distribution to other major provinces, particularly in Central Java and Banten