Interbank Market With Dsge Bank

Harmanta (), Aditya Rachmanto (), Fajar Oktiyanto () and Idham ()
Additional contact information
Harmanta: Bank Indonesia
Aditya Rachmanto: Bank Indonesia
Fajar Oktiyanto: Bank Indonesia
Idham: Bank Indonesia

No WP/12/2014, Working Papers from Bank Indonesia

Abstract: In this research DSGE model is built for Indonesian small open economy which has been completed with interbank market mechanism to illustrate financial frictions from bank’s supply side. Within the supply there exists portfolio optimization mechanism by banks, which is optimization in channeling loans or depositing in risk free asset. Meanwhile, financial friction from demand side is modelled by collateral constraint and financial accelerator. Banking sector in the model is also designed to conduct simulation of monetary policy mix (BI rate and exchange rate) and macroprudential policy (CAR requirement and LTV ratio requirement). Simulation result shows that shock in interbank market will affect bank conditions in general, especially in bank capital, CAR, and loan to deposit ratio (LDR). Bank’s balance sheet conditions will affect the real sector. This model can also capture procylicality and financial accelerator happening due to financial frictions in the economy. GDP will become higher during expansion phase if compared to condition without financial frictions, and vice versa, GDP will be lower during contraction phase. Contraction in the economy will be responded by banks by reducing loan disbursement level, caused by high risk faced by banks, which will also increase lending rate so that entrepreneur will have more difficulties in securing loans. This condition causes banks to push down loan disbursement to avoid its capital shrinking. Simulation result also shows that shock in form of monetary and macroprudential policy mix will result in more stable GDP and inflation dynamics compared to using only one policy instrument.

Keywords: monetary policy; DSGE with banking sector; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E58 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2014-12
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http://publication-bi.org/repec/idn/wpaper/WP122014.pdf First version, 2014 (application/pdf)

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