Integration Of Monetary And Macroprudential Policies Under The Influence Of Foreign Capital Flows In Controlling Inflation And Financial Stability

Abstract

This study integrates monetary policy and macroprudential policy under the influence of foreign capital flows in controlling price stability and realizing financial stability. The transmission channel for monetary policy uses the interest rate channel (Keynesian approach), while the macroprudential channel uses the capital channel (Central Bank of Indonesia).

This study uses Structural Vector Auto Regression (SVAR) analysis with Impulse Response Function (IRF) and Variant Decomposition (VD) estimation tools. The research data is secondary data sourced from the World Bank and Indonesian Economic and Financial Statistics published by Bank Indonesia with quarterly time series data for the period 2005 to 2021.

The interest rate channel as a proxy for monetary policy and the capital channel as a proxy for macroprudential policy under the pressure of foreign capital flows, integrate with each other in controlling inflation and realizing financial stability. High capital inflows to Indonesia, especially portfolio investment, are the main cause of shocks to foreign exchange reserves, inflation, and exchange rate changes. Changes in policy rates, however, significantly affect the magnitude of capital inflows into Indonesia.

On the other hand, the benchmark interest rate and capital buffer are complementary in controlling price stability and financial stability. The balanced value of the contribution of each instrument shows the commitment of both policies that strengthen each other to achieve price stability and financial stability.