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This research explores the interactive synergy between the banking sector and real economic growth in Indonesia. Demand-following and supply-leading hypotheses serve as the basic logic to understand the phenomena and help to solve the problems. Employing quarterly time-series data from 2007 to 2019 and VAR/VECM for inferential purposes, this research found a long-run relationship between liquidity, inflation rate, interest rate, and economic growth rate. Therefore, the demand-following and supply-leading hypotheses are supported in the economic development of Indonesia. Indonesia's banking sector can play the role as the engine of growth by providing the necessary funds required for lubricating the growth of the real sector, while at the same time, the growth of the real sector also pushes the development of the banking sector. In conclusion, a positive bidirectional causality between the banking sector and the real sector supports Indonesia's economic development. The key factor of Indonesia's economic stability appears to lie in its ability to maintain economic development orientation focused on a delicate balance between the growth of the supply side and the demand side. |
