Output Composition of Monetary Policy … 113 Output Composition of Monetary Policy Transmission Mechanism in Indonesia Akhsyim Afandi ∗ Abstract This paper aims to investigate the role of each aggregate spending component in the monetary policy transmission in Indonesia. It assesses the relative strength of the role of each spending component in the monetary policy transmission. In so doing, this study employs the contribution analysis, which is calculated based on the cumulative impulse response of each component of GDP to a monetary policy tightening shock estimated from structural vector autoregressive (SVAR) models. This paper finds that on average consumption spending plays predominant role in the monetary policy transmission. JEL classification numbers: C12, C22, C52 Key words: monetary policy, transmission mechanism, output composition channel, vector autoregression. 1. Introduction Monetary policy transmission mechanisms, defined as processes through which monetary policy decisions are transmitted to real GDP and inflation, involve two stages. The first stage relates to monetary-induced changes in the financial markets that serve as the transmission channels and may take the form of changes in the financial market equilibrium prices or quantities (Taylor, 1995). The second stage of the transmission mechanisms - - the subsequently induced changes in aggregate demand -- is associated with responses of each component of aggregate demand. That is, a monetary tightening shock reduces the level of economic activity through a decline in investment, consumption, and the rest of aggregate spending, which in turn alters the price level. The overwhelming majority of empirical studies exclusively deal with the investigation of the first stage of monetary policy transmission and very few investigate the second stage, despite its ∗ A/Professor of Economics -Universitas Islam Indonesia, Yogyakarta, Indonesia