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Exit Policy, Liquidity Normalization, And Its Implications On Central Bank Policy Transmission

Author

Listed:
  • Alexander Lubis

    (Bank Indonesia, Indonesia)

  • Rangga Pratama

    (Bank Indonesia, Indonesia)

  • Merlin Dwi Yunaniar

    (Bank Indonesia, Indonesia)

  • Wahyu Agung Nugroho

    (Bank Indonesia, Indonesia)

  • Dian Prima Susiandri

    (Bank Indonesia, Indonesia)

Abstract

The objective of this study is to determine the implications for the effectiveness of monetary policy transmission by examining the impact of specific policy toolkits in both Advanced Economy (AE) and Emerging Market (EM) countries during crises and during normalization (exit policy) upon crisis resolution. The analysis conducted using the VECM method on a number of AE and EM countries demonstrates that the response of bank interest rates (credit) is consistent with changes in policy rates and substantially diverges from Quantitative Easing (QE) policy in both the short and long term. However, the efficacy of monetary policy transmission appears to be diminishing following multiple crisis periods, including the Global Financial Crisis (GFC) and the COVID-19 pandemic. Furthermore, the efficacy of monetary policy transmission is higher in countries that first normalize liquidity than in those that directly increase policy rates, particularly in the aftermath of the COVID-19 pandemic.

Suggested Citation

  • Alexander Lubis & Rangga Pratama & Merlin Dwi Yunaniar & Wahyu Agung Nugroho & Dian Prima Susiandri, 2025. "Exit Policy, Liquidity Normalization, And Its Implications On Central Bank Policy Transmission," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 28(1), pages 85-116, April.
    • Handle: RePEc:idn:journl:v:28:y:2025:i:1e:p:85-116
    DOI: https://doi.org/10.59091/2460-9196.2360
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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