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Risk Appetite And Foreign Exchange Intervention In An Inflation-Targeting Framework: The Case Of Indonesia

Author

Listed:
  • Alexander Lubis

    (Bank Indonesia)

  • Constantinos Alexiou
  • Joseph G. Nellis

    (Cranfield University)

Abstract

The use of foreign exchange intervention in an inflation-targeting framework raises the question regarding its role. In addition, in an environment of volatile capital flows, how the risk appetite of foreign investors might impact the economy is worth exploring. This paper examines these issues for Indonesia by developing and estimating a dynamic stochastic general equilibrium model. This study finds that the foreign exchange intervention affects the macroeconomic variables through the portfolio channel. The risk appetite also affects the economy by increasing the price of capital. The foreign exchange intervention helps in stabilizing the economy during the presence of risk appetite shocks and monetary policy shocks.

Suggested Citation

  • Alexander Lubis & Constantinos Alexiou & Joseph G. Nellis, 2023. "Risk Appetite And Foreign Exchange Intervention In An Inflation-Targeting Framework: The Case Of Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 26(1), pages 1-38, March.
    • Handle: RePEc:idn:journl:v:26:y:2023:i:1a:p:1-38
    DOI: https://doi.org/10.59091/1410-8046.2044
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    More about this item

    Keywords

    Monetary policy; Foreign exchange intervention; DSGE;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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