From Liquidity to Employment: The KLM Lending Channel Through Labor-Intensive Credit in Indonesia

Abstract

This study investigates the transmission effectiveness of Macroprudential Liquidity Policy (KLM) on unemployment levels in Indonesia, through the working capital and investment credit channels. The study utilizes panel data from 25 provinces covering the 2021–2025 period, selected based on data availability and consistency. Estimation was conducted using the Panel Autoregressive Distributed Lag (ARDL) method with the Pooled Mean Group (PMG) approach. The estimation results indicate that working capital and investment loans have a significant negative impact on poverty levels in the long run. Increasing credit disbursement to the business sector stimulates production activity and business expansion, thereby raising labor demand and reducing poverty. These findings provide empirical evidence that the non-interest rate transmission channel via KLM loans operates effectively in influencing employment conditions in Indonesia. However, short-term estimation results reveal heterogeneity in policy transmission. The effectiveness of KLM is not uniform across provinces, as it is influenced by regional structural characteristics and business sector capacity. Therefore, credit disbursement needs to be more precisely targeted toward sectors and regions possessing high credit absorption capacity and job creation potential. Coordination among the central government, local governments, and the banking sector must be strengthened to ensure that credit expansion is effectively channeled into production activities and job creation.