EXIT POLICY, LIQUIDITY NORMALIZATION, AND ITS IMPLICATIONS ON CENTRAL BANK POLICY TRANSMISSION

Alexander Lubis, Rangga Pratama (), Merlin Dwi Yunaniar, Wahyu Agung Nugroho and Dian Prima Susiandri
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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

Bulletin of Monetary Economics and Banking, 2025, vol. 28, issue 1, 85-116

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.

Keywords: Monetary policy; Monetary transmission mechanism; Central bank policies (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:28:y:2025:i:1e:p:85-116

DOI: 10.59091/2460-9196.2360

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