Indonesia: Changing Patterns of Financial Intermediation and Their Implications for Central Bank Policy

12 Pages Posted: 24 Nov 2015

Date Written: November 2015

Abstract

As a bank-based economy, global factors affect financial intermediation and monetary transmission in Indonesia mainly through financial markets. Foreign portfolio flows to Indonesia are mostly in the form of government bonds and corporate equities, and thus directly influence the movements of the exchange rate, bond yields and equity prices. Liquidity from these portfolio flows also affect interest rate setting and bank lending. Problems in the monetary transmission mechanism arise from the shallowness of domestic financial markets, often causing excessive volatility of financial asset prices in times of stress. As such, a monetary policy that relied solely on interest rates would not be effective. We find that a policy mix of interest rates complemented by flexible exchange rate and macroprudential measures directed toward mitigating excessive lending in certain sectors and external vulnerabilities is more effective in achieving monetary and financial stability.

Full publication: What Do New Forms of Finance Mean for EM Central Banks?

Keywords: Global capital flows, financial intermediation, central bank policy

JEL Classification: F32, G1, E5

Suggested Citation

Warjiyo, Perry, Indonesia: Changing Patterns of Financial Intermediation and Their Implications for Central Bank Policy (November 2015). BIS Paper No. 83k, Available at SSRN: https://ssrn.com/abstract=2692738

Perry Warjiyo (Contact Author)

Bank Indonesia

JL. M.H. Thamrin No. 2
Jakarta, 10350
Indonesia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
93
Abstract Views
583
Rank
502,565
PlumX Metrics