An estimated open-economy DSGE model for the evaluation of central bank policy mix

Solikin Juhro, Denny Lie and Aryo Sasongko

No 2022-01, Working Papers from University of Sydney, School of Economics

Abstract: This paper builds and estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model suitable for the evaluation of central bank policy mix, with a particular application on the Indonesian economy. The model has a rich array of shocks and frictions, including banking and financial frictions. We illustrate how the estimated model can be used to investigate the source of aggregate fluctuations in Indonesia and to evaluate and simulate a policy mix involving monetary and macroprudential policies. Our Bayesian estimation identifies the COVID-19 pandemic shocks as being mainly a combination of adverse supply-side (technology) and demand-side (preference and foreign-output) shocks. We show that a countercyclical capital requirement rule could be a potent addition to Bank Indonesia's policy mix arsenal. Despite its rich features, the model is scalable and can be readily extended for evaluating other types of central bank policy mix.

Keywords: central bank policy mix; integrated policy framework; countercyclical macroprudential policy rule; DSGE model for Indonesia; COVID-19 pandemic; capital requirement (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-sea
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Citations: View citations in EconPapers (4)

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