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Dynamic Stochastic General Equilibrium With Financial Accelerator: The Case Of Indonesia

Author

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  • Kindy R. Sjahrir

    (Fiscal Policy Office, Ministry of Finance. Republic of Indonesia)

Abstract

In the last two decades shows that the Indonesian macroeconomic instability has found its roots from the financial sector's (banking's) pro-cyclicality. A number of economic and financial crisis preceded pro-cyclicality level of the financial sector in Indonesia is quite high. Indicators of real credit growth faster than GDP in the period of expansion, and the decline is far greater than the decline in GDP in the period of contraction is indicative of the high pro- cyclicality. This paper manuscript look neutrality or differences in response to the impact of fiscal and monetary policy mix as a result of the calculation of the non-conformance of the business cycle, both of which exist in the prior period as a result of the policy or the policy itself as a research problem. Neutrality impact of the response of fiscal and monetary policy mix in Indonesia in 2013 is a strategic issue of management of economic stability. With the high pro-cyclicality, then the policy is not precisely calibrated to the updated business cycle in the period may have the effect of turbulence. Fiscal policy has the potential to affect the business cycle. Monetary policy has the potential to support the stability of the financial system through its ability to affect the financial condition and behavior of financial markets, through the transmission company and the bank's balance sheet and risk-taking behavior. However, the condition of the financial system also has the potential to influence monetary stability. This paper research aims to (1) identify, analyze, and explain the phenomenon of complications response of fiscal and monetary policy mix in Indonesia; and (2) assess the methods applied to modeling the business cycle of macroeconomic stabilization policy mix that is more suitable for Indonesia as a small-open-economy in the condition (state) of stochastic uncertainty of the external economy. Finally, the results of this study recommends a systematic policy of intervention in the foreign exchange market through the feedback rule is a policy that is superior to every framework of the monetary policy rule. This is an appropriate reason for the stylized facts governance of the exchange rate as a basis for modeling framework of a small open economy with the data Indonesia. Results of this research with the data Indonesia would be generalized for the modeling framework of small open economy, provided that endogenous risk premium depends on the level of debt.

Suggested Citation

  • Kindy R. Sjahrir, 2018. "Dynamic Stochastic General Equilibrium With Financial Accelerator: The Case Of Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 201806, Department of Economics, Padjadjaran University, revised Dec 2018.
    • Handle: RePEc:unp:wpaper:201806
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    File URL: http://ceds.feb.unpad.ac.id/wopeds/201806.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic Stochastic General Equilibrium; New Keynesian Macroeconomics; Monetary Policy; Fiscal Policy; Financial Sector Accelerator; Macroeconomic Policy Mix; New Keynesian Macroeconomic; Dynamic Stochastic General Equilibrium; Financial Friction; Macroeconomic Policy Mix; Macroprudential;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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