RISK APPETITE AND FOREIGN EXCHANGE INTERVENTION IN AN INFLATION-TARGETING FRAMEWORK: THE CASE OF INDONESIA

Alexander Lubis (), Constantinos Alexiou and Joseph G. Nellis ()
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Alexander Lubis: Bank Indonesia
Joseph G. Nellis: Cranfield University

Bulletin of Monetary Economics and Banking, 2023, vol. 26, issue 1, 1-38

Abstract: The use of foreign exchange intervention in an inflation-targeting framework raises the question regarding its role. In addition, in an environment of volatile capital flows, how the risk appetite of foreign investors might impact the economy is worth exploring. This paper examines these issues for Indonesia by developing and estimating a dynamic stochastic general equilibrium model. This study finds that the foreign exchange intervention affects the macroeconomic variables through the portfolio channel. The risk appetite also affects the economy by increasing the price of capital. The foreign exchange intervention helps in stabilizing the economy during the presence of risk appetite shocks and monetary policy shocks.

Keywords: Monetary policy; Foreign exchange intervention; DSGE (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 F31 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:26:y:2023:i:1a:p:1-38

DOI: 10.59091/1410-8046.2044

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