Import Dependence and Employment Adjustment during Monetary Easing: Evidence from Indonesian Manufacturing

Abstract

This paper asks whether Indonesian manufacturing firms' reliance on imported inputs shaped their employment response to the 2019-2021 monetary easing episode, when Bank Indonesia cut its policy rate from 5.00 to 3.50 percent, and bank credit growth swung from a 2020 contraction to a 2021 recovery. Using establishment-level panel data from BPS Indonesia's (2022) Annual Survey of Large and Medium Manufacturing Industries, an event-study specification interacts firm-level import share with year indicators against a 2017 baseline. Import-dependent firms expand employment significantly more than their peers in 2021, a gap roughly three times the small pre-existing drift, robust to a wild cluster bootstrap. The effect concentrates in small, domestically owned, non-exporting firms, the firms with the least alternative financing access, while capital stock shows no differential response. A direct mechanism test on materials purchases does not show the same divergence, and a continuous specification using actual monetary conditions suggests a threshold effect tied to the depth of the easing episode rather than a smooth function of the policy rate. The paper discusses these complications, its principal limitation (a missing 2020 survey wave), and implications for targeting credit policy at trade-exposed manufacturing firms.