CENTRAL BANK POLICY MIX: KEY CONCEPTS AND INDONESIA’S EXPERIENCE
Keywords:
Central bank, monetary, macroprudential, capital flows management
Abstract
The global crisis brings about renewed reforms on central bank policy. First, in addition to the traditional mandate of price stability, there are strong supports for additional mandate of the central bank to promote financial system stability. Second, macroprudential policy is needed to address procyclicality and build-up systemic risks in the macro-financial linkages of financial system that in most cases precede and deepen financial crisis. Third, monetary and financial stability are also prone to volatility of capital flows, especially for the emerging countries, and thus there is a need to manage them. The challenge is how to mix the policies of monetary, macroprudential, and capital flows management to meet the renewed mandate of central bank on monetary and financial stability. This paper reviews theoretical underpinnings and provides key concepts to address the issues. We show that central bank policy mix is both conceptually coherent and practically implementable. We provide a concrete recommendation with a reference from Indonesia’s experience since 2010. We also raise a number of challenges from practical point of views, especially relating to decision making process, forecasting model, and communication, for the success of the policy mix.
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References
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Jorda, O., M. Schularick, dan A.M. Taylor. (2011). Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons. IMF Economic Review 59(2).
Jorda, O., M. Schularick, dan A.M. Taylo. (2014). Betting the house. NBER Working Paper No. 20771, December.
Kawai, M. and S. Takagi. (2008). A Survey of the Literature on Managing Capital Inflows. ADB Institute Discussion Paper No. 100, March.
Kawai, M. and P. J. Morgan. (2012). Central Banking for Financial Stability in Asia. Asian Development Bank Institute (ADBI) Working Paper No. 377.
Kindleberger, C. (1978). Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books.
Koepke, R. (2015). What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature. Institute of International Finance, University of Wurzburg.
Kohn, D. (2015). Implementing Macroprudential and Monetary Policies: The Case for Two Committees. Brooking Institute.
Minsky, H.P. (1982). The Financial Instability Hypothesis. Levy Economics Institute Working Paper No. 74.
Mohanty, M and M. Klau. (2004). Monetary Policy Rules in Emerging Market Economies: Issues and Evidence. BIS Working Papers No. 149.
Morris, S., and Shin, H. S. (2004). Liquidity Black Holes. Review of Finance, 8(1), 1–18.
Obstfeld, M. (2015). Trilemmas and Trade-Offs: Living with Financial Globalisation. BIS Working Papers No 480.
Ostry, J D, Ghosh, A R and Chamon, M. (2012). Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies. IMF Staff Discussion Note SDN/12/01.
Purnawan, M., and Nasir, M. (2015). The Role of Macroprudential Policy to Manage Exchange Rate Volatility, Excess Banking Liquidity and Credits. Bulletin of Monetary, Economics and Banking, 18(1).
Rajan, R. G. (1994). Why Bank Credit Policies Fluctuate: A Theory and Some Evidence. Quarterly Journal of Economics, 109(32), 399–441.
Reinhart, C. M., and Rogoff, K. S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton Press.
Taylor, JB. (2010). Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis. Federal Reserve Bank of St. Louis Review, May/June.
Utari, G., Arimurti, T., and Kurniati, I. (2012). Optimal Credit Growth and Macroprudential Policy in Indonesia. Bulletin of Monetary, Economics and Banking, October.
Vredin, A. (2015). Inflation targeting and financial stability: providing policymakers with relevant information. BIS Working Papers No 503, July.
Warjiyo, P. (2013a). Macroeconomic Policy Mix for Promoting Sustainable and Inclusive Growth.
Keynote Speech at the ESCAP High Level Policy Dialogue and Eleventh Bank Indonesia Annual International Seminar, Yogyakarta, May.
Warjiyo, P. (2013b). Indonesia’s monetary policy: coping with volatile commodity prices and capital inflows. BIS Papers No. 70, January.
Warjiyo, P. (2013c). Indonesia: stabilizing the exchange rate along its fundamental. BIS Papers No. 73, October.
Warjiyo, P. (2014a). US monetary policy normalization and EME policy mix – the Indonesian experience. Speech at the NBER 25th Annual East Asian Seminar on Economics, Tokyo, June.
Warjiyo, P. (2014b). The transmission mechanism and policy responses to global monetary developments: the Indonesian experience. BIS Papers No. 78, August.
Warjiyo, P. (2015a). Indonesia: Changing patterns of financial intermediation and their implications for central bank policy. BIS Papers No. 83.
Warjiyo, P. (2015b). Indonesia: Global Spillover and Policy Response. Paper presented at the Asia Economic Policy Conference (AEPC), Federal Reserve Bank of San Francisco (FRBSF), November.
Williams, J.C. (2015). Measuring Monetary Policy’s Effect on House Prices. Federal Reserve Bank of San Fransisco Economic Letters 2015-28, August.
Wimanda, RE., MI. Permata, MB. Bathaludin, and WA Wibowo. (2012). Study on Implementing Macroprudential Policy in Indonesia. Bank Indonesia Working Paper No. WP/11/2012, December.
Wimanda, RE., N. Maryaningsih, L. Nurliana, R. Satyanugroho. (2014). Evaluating the Transmission of Policy Mix in Indonesia. Bank Indonesia Working Paper No. WP/3/2014.
Woodford, M. (2012). Inflation Targeting and Financial Stability. NBER Working Paper No. 17967.
Yellen, JL. (2014). Monetary Policy and Financial Stability. Remarks at the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C.
Acharya, V. V., & Yorulmazer, T. (2003). Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk. CEPR Discussion Paper (No. 3743).
Agénor, P.R. and L.A.P. da Silva. (2013). Inflation Targeting and Financial Stability: A Perspective from the Developing World, Banco Central do Brazil Working Paper (No. 324), September.
Aizenman, J, M. Hutchison and I. Noy. (2011). Inflation targeting and real exchange rates in emerging markets, World Development, 39(5), 712-24.
Alamsyah, H., J. Adamanti, D. Yumanita, and RI. Astuti. (2014). Financial Cycles in Indonesia. Bank Indonesia Working Paper (No. WP/8/2014)., December.
Allen, F., A. Babus and E. Carletti. (2010). Financial Connections and Systemic Risk. NBER Working Paper 16177, July.
Allen, W. and Wood, G. (2006). Defining and achieving financial stability. Journal of Financial Stability, June, pp. 152-172.
Bank for International Settelments (BIS). (2011). Central bank Governance and Financial Stability. A report by a Study Group chaired by Stefan Ingves, Governor, Sveriges Riksbank, May.
Bank for International Settelments (BIS). (2012). A framework for dealing with domestic systemically important banks. Basle Committee on Banking Supervision (BCBS), October.
Berg, C., K. Hallsten, V.Q. Von HeideKen, and U. Söderström.(2013). Two Decades of Inflation Targeting: Main Lessons and Remaining Challenges. Sveriges Riksbank Economic Review, Special Issue.
Bernanke, B. (2009, November 29). The Right Reform for the Fed. Washington Post, Washington.
Bernanke, B. (2010). Monetary Policy and the Housing Bubble. Speech at the Annual Meeting of the American Economic Association, Atlanta, January.
Bernanke, B and M. Gertler. (2000). Monetary Policy and Asset Price Volatility. NBER Working Paper No. 7559, February.
Bikhchandani, S. and S. Sharma. (2001). Herd Behaviour in Financial Market, IMF Staff Papers 47(3).
Bisias, D., M. Flood, A.W. Lo, S. Valavanis. (2012). A Survey of Systemic Risk Analytics. USTreasury Office of Financial Research Working Paper 0001, January.
Bordo, M, B. Eichengreen, D. Klingebiel, and M.S. Martinez-Peria. (2001). Is the Crisis Problem Growing More Severe?. Centre for Economic Policy Research (CEPR) Economic Policy.
Bloxham, P., C. Kent and M. Robson. (2011). Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study. NBER Working Paper No. 16485.
Calvo, G. dan C. Reinhart. (2000). When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options in P. B. Kenen and A. K. Swoboda, eds., Reforming the International Monetary and Financial System, Washington, DC: International Monetary Fund.
Claessens, S., M.A. Kose and M.E. Terrones. (2011). How Do Business and Financial Cycles Interact?. IMF Working Paper WP/11/88.
Claessens, S. and M. A. Kose. (2013). Financial Crises: Explanations, Types, and Implications. IMF Working Paper WP/13/28.
Diamond, D.W. dan R.G. Rajan. (2010). Fear of fire sales and the credit freeze. BIS Working Papers No. 305, March.
European Banking Authority (EBA). (2015). Risk Assessment of the European Banking System, December.
Filardo, A.J. (2001). Should monetary policy respond to asset price bubles? Some experimental results. Federal Reserve of Kansas City RWP 01-04, July.
Freixas, X., B. Parigi dan J.C. Rochet. (2000). Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank. Journal of Money, Credit and Banking, 32(3): 611-638.
Greenspan, A. (2002). Opening Remarks in Rethinking Stabilization Policy. A Symposium sponsored by the Federal Reserve Bank of Kansas City.
Harmanta, Tarsidin, MB. Bathaluddin, Idham. (2012). ARIMBI with Macroprudential Policy. Bank Indonesia: Economic Research Group, July.
Harmanta, N.M.A. Purwanto, A. Rachmanto, and F. Oktiyanto. (2013). Monetary and Macroprudential Policy Mix under Financial Frictions Mechanism with DSGE Model. Bank Indonesia, December.
Harun, CA., AA. Taruna, RR. Nattan, N. Surjaningsih. (2014). Financial Cycle of Indonesia – Potential Forward Looking Analysis. Bank Indonesia Working Paper No. WP/9/2014, December.
Indawan, F., S. Fitriani, MI. Permata, and I. Karlina. (2013). Capital Flows in Indonesia: the Behavior, the Role, and Its Optimality Uses for the Economy. Bank Indonesia: Bulletin of Monetary, Economics and Banking, January.
International Monetary Fund (IMF). (2009). Initial Lessons of the Crisis prepared by the Research, Monetary and Capital Markets, and Strategy, Policy, and Review Departments, February.
International Monetary Fund (IMF). (2012). The Liberalization and Management of Capital Flows: An Institutional View. Washington, DC; November.
International Monetary Fund (IMF). (2013). Guidance Note for the Liberalization and Management of Capital Flows. Washington, DC; April.
International Monetary Fund (IMF). (2015). Managing Capital Outflows-Further Operational Consideration. Washington, DC, December.
Jorda, O., M. Schularick, dan A.M. Taylor. (2011). Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons. IMF Economic Review 59(2).
Jorda, O., M. Schularick, dan A.M. Taylo. (2014). Betting the house. NBER Working Paper No. 20771, December.
Kawai, M. and S. Takagi. (2008). A Survey of the Literature on Managing Capital Inflows. ADB Institute Discussion Paper No. 100, March.
Kawai, M. and P. J. Morgan. (2012). Central Banking for Financial Stability in Asia. Asian Development Bank Institute (ADBI) Working Paper No. 377.
Kindleberger, C. (1978). Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books.
Koepke, R. (2015). What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature. Institute of International Finance, University of Wurzburg.
Kohn, D. (2015). Implementing Macroprudential and Monetary Policies: The Case for Two Committees. Brooking Institute.
Minsky, H.P. (1982). The Financial Instability Hypothesis. Levy Economics Institute Working Paper No. 74.
Mohanty, M and M. Klau. (2004). Monetary Policy Rules in Emerging Market Economies: Issues and Evidence. BIS Working Papers No. 149.
Morris, S., and Shin, H. S. (2004). Liquidity Black Holes. Review of Finance, 8(1), 1–18.
Obstfeld, M. (2015). Trilemmas and Trade-Offs: Living with Financial Globalisation. BIS Working Papers No 480.
Ostry, J D, Ghosh, A R and Chamon, M. (2012). Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies. IMF Staff Discussion Note SDN/12/01.
Purnawan, M., and Nasir, M. (2015). The Role of Macroprudential Policy to Manage Exchange Rate Volatility, Excess Banking Liquidity and Credits. Bulletin of Monetary, Economics and Banking, 18(1).
Rajan, R. G. (1994). Why Bank Credit Policies Fluctuate: A Theory and Some Evidence. Quarterly Journal of Economics, 109(32), 399–441.
Reinhart, C. M., and Rogoff, K. S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton Press.
Taylor, JB. (2010). Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis. Federal Reserve Bank of St. Louis Review, May/June.
Utari, G., Arimurti, T., and Kurniati, I. (2012). Optimal Credit Growth and Macroprudential Policy in Indonesia. Bulletin of Monetary, Economics and Banking, October.
Vredin, A. (2015). Inflation targeting and financial stability: providing policymakers with relevant information. BIS Working Papers No 503, July.
Warjiyo, P. (2013a). Macroeconomic Policy Mix for Promoting Sustainable and Inclusive Growth.
Keynote Speech at the ESCAP High Level Policy Dialogue and Eleventh Bank Indonesia Annual International Seminar, Yogyakarta, May.
Warjiyo, P. (2013b). Indonesia’s monetary policy: coping with volatile commodity prices and capital inflows. BIS Papers No. 70, January.
Warjiyo, P. (2013c). Indonesia: stabilizing the exchange rate along its fundamental. BIS Papers No. 73, October.
Warjiyo, P. (2014a). US monetary policy normalization and EME policy mix – the Indonesian experience. Speech at the NBER 25th Annual East Asian Seminar on Economics, Tokyo, June.
Warjiyo, P. (2014b). The transmission mechanism and policy responses to global monetary developments: the Indonesian experience. BIS Papers No. 78, August.
Warjiyo, P. (2015a). Indonesia: Changing patterns of financial intermediation and their implications for central bank policy. BIS Papers No. 83.
Warjiyo, P. (2015b). Indonesia: Global Spillover and Policy Response. Paper presented at the Asia Economic Policy Conference (AEPC), Federal Reserve Bank of San Francisco (FRBSF), November.
Williams, J.C. (2015). Measuring Monetary Policy’s Effect on House Prices. Federal Reserve Bank of San Fransisco Economic Letters 2015-28, August.
Wimanda, RE., MI. Permata, MB. Bathaludin, and WA Wibowo. (2012). Study on Implementing Macroprudential Policy in Indonesia. Bank Indonesia Working Paper No. WP/11/2012, December.
Wimanda, RE., N. Maryaningsih, L. Nurliana, R. Satyanugroho. (2014). Evaluating the Transmission of Policy Mix in Indonesia. Bank Indonesia Working Paper No. WP/3/2014.
Woodford, M. (2012). Inflation Targeting and Financial Stability. NBER Working Paper No. 17967.
Yellen, JL. (2014). Monetary Policy and Financial Stability. Remarks at the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C.
Published
2016-06-30
How to Cite
Warjiyo, P. (2016). CENTRAL BANK POLICY MIX: KEY CONCEPTS AND INDONESIA’S EXPERIENCE. Buletin Ekonomi Moneter Dan Perbankan, 18(4), 379-408. https://doi.org/10.21098/bemp.v18i4.573
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
