AN ESTIMATED OPEN-ECONOMY DSGE MODEL FOR THE EVALUATION OF CEN TION OF CENTRAL BANK POLICY MI TRAL BANK POLICY MIX

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

Bulletin of Monetary Economics and Banking, 2023, vol. 26, issue 3, 397-436

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, including monetary-macroprudential-fiscal policy interaction and the inclusion of Central Bank Digital Currency (CBDC).

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)
JEL-codes: E12 E32 E58 E61 F41 (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:3a:p:397-436

DOI: 10.59091/2460-9196.2126

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