Effectiveness and conduct of macroprudential policy in Indonesia in 2003-2020: Evidence from the structural VAR models

Dąbrowski, Marek A. and Widiantoro, Dimas Mukhlas (2022): Effectiveness and conduct of macroprudential policy in Indonesia in 2003-2020: Evidence from the structural VAR models.

Abstract

The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-Covid-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-Covid-19 period.

• Item Type: MPRA Paper
• Language: English
• Keywords: macroprudential policy; loan-to-value policy; structural vector autoregressive models; financial stability
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; G - Financial Economics > G1 - General Financial Markets > G10 - General

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