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Monetary Transmission Of Persistent Shock To The Risk Premium: The Case Of Indonesia

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  • Akhis R. Hutabarat

    (Bank Indonesia)

Abstract

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.

Suggested Citation

  • Akhis R. Hutabarat, 2011. "Monetary Transmission Of Persistent Shock To The Risk Premium: The Case Of Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 13(4), pages 1-34, April.
    • Handle: RePEc:idn:journl:v:13:y:2011:i:4d:p:1-34
    DOI: https://doi.org/10.21098/bemp.v13i4.267
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    More about this item

    Keywords

    Exchange rate; Balance of Payment; Monetary transmission and policy; Dynamic General Equilibrium.;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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