Monetary and macroprudential policies in the presence of external shocks: evidence from an emerging economy

Abstract

Purpose

This paper examines the impact of using the reserve requirements, combined with foreign exchange (FX) intervention, as key instruments in an inflation-targeting framework.

Design/methodology/approach

In the context of a dynamic stochastic general equilibrium (DSGE) framework and using Bayesian techniques, the authors estimate a model for the Indonesian economy using quarterly data spanning the period 2005Q2–2019Q4.

Findings

The reserve requirement is found to assume a complementary role to that of the interest rate policy and FX intervention when used to stabilise the macroeconomy.

Originality/value

This paper provides a benchmark for other emerging countries that consider adopting the inflation targeting framework and impose an FX intervention as part of their monetary policy.

Citation

Lubis, A., Alexiou, C. and Nellis, J.G. (2022), "Monetary and macroprudential policies in the presence of external shocks: evidence from an emerging economy", Journal of Economic Studies, Vol. 49 No. 6, pp. 960-977. https://doi.org/10.1108/JES-11-2020-0577