FISCAL POLICY STANCE, CENTRAL BANK DIGITAL CURRENCY, AND THE OPTIMAL MONETARY-MACROPRUDENTIAL POLICY MIX

Solikin Juhro, Denny Lie, Atet Rizki Wijoseno and Mohammad Aly Fikry ()
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Atet Rizki Wijoseno: University of North Carolina
Mohammad Aly Fikry: Bank Indonesia

No WP/01/2022, Working Papers from Bank Indonesia

Abstract: This paper seeks to answer the following policy-relevant questions: (i) does the complementarity between monetary and macroprudential policies depend on the monetary and fiscal policy stances, and (ii) what is the likely aggregate effect of a central bank digital currency (CBDC) issuance on the existing central bank policy mix (CBPM) framework. We analyze these questions within a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model for Indonesia with a non-trivial fiscal policy and a parsimonious CBDC effect. On the first question, we find that monetaryfiscal policy stances do matter for whether a macroprudential policy rule stabilizes business cycle fluctuations and is welfare-improving. It is still the case, however, a passive monetary, active fiscal regime (PMAF) is sub-optimal compared to the active monetary, passive fiscal (AMPF) regime counterpart. On the second question, we find that a CBDC issuance lowers the transaction costs and its effects on aggregate economic variables are similar to the effects of a permanent technological progress.

Keywords: integrated policy framework; central bank policy mix; DSGE model for Indonesia; monetary-fiscal policy coordination; macroprudential-fiscal policy coordination; central bank digital currency (CBDC) (search for similar items in EconPapers)
JEL-codes: E12 E32 E58 E61 E63 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-pay and nep-sea
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http://publication-bi.org/repec/idn/wpaper/WP012022.pdf First version, 2022 (application/pdf)

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