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Monetary-Macroprudential Policy Mix And Covid-19 Pandemic In An Estimated Dsge Model For Indonesia

Author

Listed:
  • Solikin M. Juhro

    (Bank Indonesia)

  • Denny Lie

    (Bank Indonesia)

  • Aryo Sasongko

    (Bank Indonesia)

Abstract

This study builds and estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model for Indonesia with banking and financial frictions. Using the model we investigate the relative performance of various monetary & macroprudential policy mixes when the economy is hit by COVID-19 pandemic shocks, which we identify from the data and the model restrictions as being a combination of adverse supply-side (technology) and demand-side (preference and foreign-output) shocks. We find that technology shocks are the dominant shocks causing business cycle fluctuations in Indonesia, both during the whole inflation-targeting period and in the more recent, ongoing COVID-19 period. This in turn implies that a policy mix that combines monetary policy with a countercyclical macroprudential policy that directly affects the supply of credit—capital requirement, reserve requirement, or liquidity buffer regulation—would be welfare-improving and a better option for the central bank as it navigates the pandemic-induced economic contraction. A countercyclical credit demand-channel macroprudential policy such as a loan-to-value ratio regulation, however, may amplify aggregate fluctuations.

Suggested Citation

  • Solikin M. Juhro & Denny Lie & Aryo Sasongko, 2021. "Monetary-Macroprudential Policy Mix And Covid-19 Pandemic In An Estimated Dsge Model For Indonesia," Working Papers WP/01/2021, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp012021
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    References listed on IDEAS

    as
    1. Noriyuki Yanagawa & Hiromi Yamaoka, 2019. "Digital Innovation, Data Revolution and Central Bank Digital Currency," Bank of Japan Working Paper Series 19-E-2, Bank of Japan.
    2. Solikin M. Juhro & A . Farid Aulia, 2019. "New Sources Of Growth: The Role Of Frugal Innovation And Transformational Leadership," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(3), pages 1-20.
    3. John Murray, 2019. "Central Banks and the Future of Money," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 540, April.
    4. Solikin M. Juhro, 2022. "Central Bank Policy Mix: Issues, Challenges, and Policy Responses," Springer Books, in: Perry Warjiyo & Solikin M. Juhro (ed.), Central Bank Policy Mix: Issues, Challenges, and Policy Responses, chapter 0, pages 17-26, Springer.
    Full references (including those not matched with items on IDEAS)

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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.

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    More about this item

    Keywords

    integrated policy framework; central bank policy mix; countercyclical macroprudential policy rule; DSGE model for Indonesia; COVID-19 pandemic; loan-to-value ratio; reserve requirement; capital requirement; liquidity buffer;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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