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Interaction between Monetary and Macroprudential Policy to Enhance Financial Stability: Evidence from Indonesia
Yulia Indrawati, Munawar Ismail, David Kaluge, Ghozali Maski

Doctoral Student at Doctoral Program of Economics – Faculty of Economics and Business, Brawijaya University, Malang, Indonesia.

Department of Economics - Faculty of Economics and Business – Brawijaya University, Malang, Indonesia


Abstract

This study aimed to analyze the interaction between monetary and macroprudential policy through the function of the central banks objectives, namely The Plain Vanilla Taylor rule, Lean against the wind Taylor rule, Independent Macroprudential policy rule and Lean against the wind Taylor rule with Macroprudential policy. The value of parameter was obtained from Ordinary Least Square (OLS) estimation of the linear regression model and previous empirical study. Quadratic linear problems are solved using numerical optimizer csminwel of Chris Sims. The optimum coefficient calculation applied Dynare Optimal Simple Rule routine using the application of Dynare 4.4.3 and Matlab software. The result of study shows that independent macroprudential policy rule generating the most minimal value of loss function and the higher response of interest rate smoothing than Plain Vanilla Taylor rule and others model. This suggests that macroprudential instruments as a buffer in the optimal of monetary policy minimize the loss function of the central bank. In this case, the interest rate instrument is used to reach the stability of inflation and output. Furthermore, macroprudential policy is used to respond to credit growth. This is in line with Tinbergen principle.

Keywords: Monetary policy; Macroprudential policy; Loss Function; Open Economy

Topic: Sosical Economic and Community Development

Link: https://ifory.id/abstract/WTBt3jAfF6dU

Conference: International Conference on Innovation and Technology (ICIT 2019)

Plain Format | Corresponding Author (Yulia Indrawati)

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