Indonesia: the macroprudential framework and the central bank’s policy mix

Perry Warjiyo
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Perry Warjiyo: Bank for International Settlements

A chapter in Macroprudential frameworks, implementation and relationship with other policies, 2017, vol. 94, pp 189-205 from Bank for International Settlements

Abstract: Recent crises have clearly highlighted the importance of understanding macro-financial linkages in order to mitigate the build-up of systemic risks to financial and macroeconomic stability, and sustainable economic growth. This note describes the role of macroprudential policy as an integral part of the central bank policy mix and financial stability in Indonesia. It encompasses regulation and surveillance from a macro perspective with a focus on systemic risk. A number of macroprudential policy measures have been implemented in Indonesia, including loan-to-value (LTV) ratios, reserve requirements and a capital conservation buffer, and these have proven successful in mitigating the build-up of systemic risks to financial stability as well as strengthening monetary policy in achieving price stability. In line with the central bank’s revised mandate for combined price and financial system stability, the policy mix comprises interest rate, exchange rate, capital flow management and macroprudential elements. Our experience since 2010 shows that the current policy mix has advantages over the standard inflation targeting framework. In addition to implementing a sound macroprudential framework to promote financial stability, Indonesia has underpinned its crisis management protocol for prevention and resolution of the financial system crisis with a strong legal foundation (ie the Law on Financial System Crisis Prevention and Resolution of 2016).

Date: 2017
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