MONETARY-MACROPRUDENTIAL POLICY MIX AND COVID-19 PANDEMIC IN AN ESTIMATED DSGE MODEL FOR INDONESIA

Solikin Juhro, Denny Lie and Aryo Sasongko ()
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Aryo Sasongko: Bank Indonesia

No WP/01/2021, Working Papers from 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.

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 (search for similar items in EconPapers)
JEL-codes: E12 E32 E58 E61 F41 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf, nep-mac, nep-mon, nep-pay and nep-sea
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Citations: View citations in EconPapers (1)

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http://publication-bi.org/repec/idn/wpaper/WP012021.pdf First version, 2021 (application/pdf)

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