Central Bank Innovations and Financial Stability in Indonesia: A Threshold Estimation

Document Type : Research Paper

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Department of Economics and Development Studies, Faculty of Economics and Business, Universitas Sultan Ageng Tirtayasa, Banten, Indonesia

Abstract

Central bank innovations in terms of monetary and macroprudential policies and their interaction with the economy could have a non-linear effect on financial stability in Indonesia. There exists an optimal threshold level from which the central bank rate and macroprudential policy index affect financial stability. This study employs threshold autoregressive (TAR) methodology on Indonesian data to examine the effect of monetary and macroprudential policies on the growth of credit over the period 1990Q1 to 2020Q4 in Indonesia. The result indicates that TAR regression is significantly better than linear regression. In particular, TAR estimation reveals that the central bank rate and macroprudential policy index threshold levels were 7.3 and 0.145, respectively. Monetary policy tends to promote financial stability when the policy rate is above the threshold. It reveals that in periods with high macroprudential policy index, tight monetary and macroprudential policies promote financial stability. This indicates the need for policy coordination to foster sustained financial stability.

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Iranian Economic Review
Volume 28, Issue 1
April 2024
Pages 111-128

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