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Indonesia: the macroprudential framework and the central bank’s policy mix

In: Macroprudential policy frameworks, implementation and relationships with other policies

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  • Perry Warjiyo

    (Bank for International Settlements)

Abstract

Recent crises have clearly highlighted the importance of understanding macro-financial linkages in order to mitigate the build-up of systemic risks to financial and macroeconomic stability, and sustainable economic growth. This note describes the role of macroprudential policy as an integral part of the central bank policy mix and financial stability in Indonesia. It encompasses regulation and surveillance from a macro perspective with a focus on systemic risk. A number of macroprudential policy measures have been implemented in Indonesia, including loan-to-value (LTV) ratios, reserve requirements and a capital conservation buffer, and these have proven successful in mitigating the build-up of systemic risks to financial stability as well as strengthening monetary policy in achieving price stability. In line with the central bank’s revised mandate for combined price and financial system stability, the policy mix comprises interest rate, exchange rate, capital flow management and macroprudential elements. Our experience since 2010 shows that the current policy mix has advantages over the standard inflation targeting framework. In addition to implementing a sound macroprudential framework to promote financial stability, Indonesia has underpinned its crisis management protocol for prevention and resolution of the financial system crisis with a strong legal foundation (ie the Law on Financial System Crisis Prevention and Resolution of 2016).

Suggested Citation

  • Perry Warjiyo, 2017. "Indonesia: the macroprudential framework and the central bank’s policy mix," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy frameworks, implementation and relationships with other policies, volume 94, pages 189-205, Bank for International Settlements.
    • Handle: RePEc:bis:bisbpc:94-15
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    References listed on IDEAS

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    1. Muhammad Edhie Purnawan & M. Abd. Nasir, 2015. "The Role of Macroprudential Policy to Manage Exchange Rate Volatility, Excess Banking Liquidity and Credits," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 18(1), pages 1-24, July.
    2. repec:idn:journl:v:18:y:2015:i:1:p:1-24 is not listed on IDEAS
    3. G.A Diah Utari & Trinil Arimurti & Ina Nurmalia Kurniati, 2012. "Optimal Credit Growth," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 15(2), pages 1-32, October.
    4. Claessens, Stijn & Ghosh, Swati R. & Mihet, Roxana, 2013. "Macro-prudential policies to mitigate financial system vulnerabilities," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 153-185.
    5. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
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    Cited by:

    1. Solikin M. Juhro & Denny Lie & Atet Rizki Wijoseno & Mohammad Aly Fikry, 2022. "Fiscal Policy Stance, Central Bank Digital Currency, And The Optimal Monetary-Macroprudential Policy Mix," Working Papers WP/01/2022, Bank Indonesia.
    2. Dąbrowski, Marek A. & Widiantoro, Dimas Mukhlas, 2022. "Effectiveness and conduct of macroprudential policy in Indonesia in 2003-2020: Evidence from the structural VAR models," MPRA Paper 112963, University Library of Munich, Germany.
    3. Fransiskus Xaverius Lara Aba, 2021. "Institutional Change and Macroeconomic Variables in the ASEAN—Indonesia, Vietnam, and Cambodia: The Effects of a Trade War between China and USA," Economies, MDPI, vol. 9(4), pages 1-21, December.

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