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Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia

Tevy Chawwa

Economic Analysis and Policy, 2021, vol. 71, issue C, 321-341

Abstract: This paper presents a model to capture the impact of the Basel III’s Liquidity Coverage Ratio (LCR) and the reserves requirement regulation on the banking sector and the real economy. It employs a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model with financial frictions and calibrated to match data for Indonesia. The study shows that the impact of changing the two liquidity requirements on lending and output are relatively similar. However, lowering the LCR has consequences on the decline of demand for government bonds, so that it has a different impact on taxes, household deposits and bank’s profit. This paper also found that countercyclical liquidity regulations can improve welfare and reduce the volatility of bank loans.

Keywords: Liquidity; Macroprudential policy; DSGE (search for similar items in EconPapers)
JEL-codes: E47 E50 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.eap.2021.05.002

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