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There are many studies related to finance-growth nexus, but existing empirical evidences still have not provided conclusive result of the nature and direction of this relationship. Moreover, there are only few studies about finance-growth nexus seen from Islamic finance perspective, especially in Indonesia. Therefore, this study aims to examine the nature of causal relationship between Islamic finance development and economic growth in Indonesia seen from the development of Islamic banking, sukuk market and Islamic stock market.

By using quarterly data from 2002Q3 to 2017Q4, this study uses vector autoregressive (VAR) model, then uses granger causality and impulse response function to analyze the causal relationship between Islamic finance development and economic growth and also among three main sub-sectors of Islamic finance.

This study found that Islamic banking development and Islamic stock market development support neutrality hypotheses view, while sukuk market development supports supply-leading hypotheses view. Moreover, this study also found that there are unidirectional causalities from sukuk market development to Islamic banking development and from sukuk market development to Islamic stock market development.

This study focuses only on the development of Islamic finance viewed from a macro perspective and only looks at how the three main sub-sectors in Islamic finance develop. In addition, the results of research related to finance-growth nexus are also sensitive to the object of research, the method and the proxies of variables used.

To the best of the authors’ knowledge, there is no study that examines the causal relationship between Islamic finance development and economic growth in Indonesia based on its three main sub-sectors simultaneously. So, this study gives empirical evidence to contribute on finance-growth nexus discussion based on three main sub-sectors of Islamic finance development in Indonesia.

Studies linking monetary policy to inflation and unemployment rates in the context of the Phillips curve are limited to conventional economics. On the other hand, research related to application of the dual monetary policy is limited to discussion of monetary policy transmission lines, especially in Islamic banking channels. Therefore, this study aims to determine the monetary policy response in implementation of the dual monetary policy to two important indicators in the macro economy, namely, inflation and unemployment. In addition, the study reveals the relevance of the Phillips curve in Indonesia.

The method used is vector auto regression vector autoregression (VAR) with monthly data from February 2005 to October 2016 for the first model and semi-annual data from February 2005 to August 2017 for the second model. Analysis of VAR estimation in this research uses the impulse response function (IRF) to analyze the degree of sensitivity or responsiveness to a shock between variables and the variance decomposition (VD) application to analyze how the proportion of each independent variable’s contribution affects the money supply.

The result shows that monetary policy has responded appropriately to the problems of inflation and unemployment. However, inflation generates a bigger response than unemployment. Bank Indonesia considers the inflation expectations aspect of both conventional and Islamic references. Finally, the concept of the Phillips curve proves to be irrelevant in Indonesia.

The central bank is expected to build a more effective policy for transmission from the monetary sector to the real sector to effectively overcome the problems of inflation and unemployment. Furthermore, Indonesia needs to increase policies to overcome problems on the supply side.

The results of this study provide new insights into application of the dual monetary policy toward inflation and unemployment.