Characterising the Islamic Financial Cycle in Indonesia Post-Pandemic Era: Markov Switching Approach

Numerous scholars have conducted studies on the conventional financial cycle, yet there is a lack of scholarly discourse on the distinct Islamic financial cycle. However, Islamic finance plays a significant role within a nation’s economic framework, particularly in regions with a predominantly Islamic population. This study integrates variables from Islamic banking, the Islamic capital market, and macroeconomics, covering the period from 2009 to 2022. The research employs the MSVAR methodology to identify and analyze transitions between distinct regimes. The findings indicate that the duration of the deceleration regime phase is longer than the accelerated regime phase, lasting approximately 9 years versus 5 years. Furthermore, the study reveals that the six variables examined significantly impact Indonesia’s economic growth, with each variable displaying a unique response to shocks.