The Influence of Monetary Instrument toward Money Demand M2 under Dual Banking System in Indonesia Period 2015-2018 Imam Haryadi and Vinny Kurniati Islamic Economics Department, Faculty of Economics and Management, University of Darussalam Gontor, Indonesia Keyword: Dual Banking System, Monetary Instruments. Abstract: Money demand holds an important role in monetary policy’s behaviour in overall economic activities. Moreover, Bank Indonesia use monetary instrument which transform to dual banking system. This research has purpose to analyze the influence of monetary instruments toward money demand M2 under dual banking system and to know the monetary instrument more stable and faster in influencing money demand M2 under dual banking system. The data used in this research was secondary data earned from Indonesia Banking Statistics (SPI), Sharia Banking Statistics (SPS), Indonesian Financial Statistic (SEKI) and Financial Service Authority (OJK). using the time series data from January 2015 till December 2018. In order to achieve the purpose, this research used Vector Autoregression/Vector Error Correction Model. The research concluded that the influence of monetary instruments toward M2 under dual banking system are significant. Based on VECM result, conclude that Islamic monetary instruments are more significant influenced than conventional one toward M2. based on IRF result, conventional monetary instrument more stable and faster than Islamic monetary instrument which FASBI and SRR more stable and faster than FASBIS and SRRISL in influencing money demand M2. But, SBIS is more stable and faster than SBI to influence Islamic M2 and increase economic growth. 1 INTRODUCTION According to the law No. 10 1998 Indonesia has operating dual banking system. It is due to the fact that monetary policy has practiced dual system which monetary stability be the same purpose of them and become the most important targets. There are the different principle of taking profit between dual banking system, distribution of fund in conventional bank based on interest rates. On the contrary, Islamic bank did not based on interest rate for taking the profit. In addition, the inflation would give the effect in reducing effectiveness monetary policy especially, for influencing money demand, money instability and purchasing power of money. Moreover, this decreasing, would effect to demand for holding money or saving money. Conceptually, the inflation volatility is the result one of the highest growth of money supply. Whereas, Bank Indonesia as monetary authority, maintain the money stability by optimizing monetary operation in money market and strengthen the monetary policy by stabilizing monetary instrument in financial system. Commonly, there are the monetary instruments through conventional banking system such as Open Market Operation (OMO), discount rate and reserve requirement. While, Islamic banking system, bank Indonesia used reserve requirement (SRR), Open Market Operations and Standing Facilities. The different concept between Islamic bank and conventional bank for getting the profits which influence the money demand M2 under dual banking system. Then, this paper will compare the monetary instruments in every bank. Actually, those instruments are influenced by interest rate and interest rate negatively correlated to the money demand and income positively correlated against money demand. This describes that the influence of interest rate, because the Government conducts the monetary contraction, interest rate will be raised which cause increasing on monetary instruments such as SBI, FASBI and SRR. From here the Government wants to decrease money demand and money supply in the community. It will slow the economic growth. 46 Haryadi, I. and Kurniati, V. The Influence of Monetary Instrument toward Money Demand M2 under Dual Banking System in Indonesia Period 2015-2018. DOI: 10.5220/0010114600460051 In Proceedings of the 7th ASEAN Universities International Conference on Islamic Finance (7th AICIF 2019) - Revival of Islamic Social Finance to Strengthen Economic Development Towards a Global Industrial Revolution, pages 46-51 ISBN: 978-989-758-473-2 Copyright c  2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved