IDEAS home Printed from https://ideas.repec.org/a/spr/eurase/v13y2023i3d10.1007_s40822-023-00244-w.html
   My bibliography  Save this article

Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models

Author

Listed:
  • Marek A. Dąbrowski

    (Krakow University of Economics)

  • Dimas Mukhlas Widiantoro

    (Krakow University of Economics)

Abstract

The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-COVID-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-COVID-19 period.

Suggested Citation

  • Marek A. Dąbrowski & Dimas Mukhlas Widiantoro, 2023. "Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(3), pages 703-731, December.
    • Handle: RePEc:spr:eurase:v:13:y:2023:i:3:d:10.1007_s40822-023-00244-w
    DOI: 10.1007/s40822-023-00244-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40822-023-00244-w
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s40822-023-00244-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kuttner, Kenneth N. & Shim, Ilhyock, 2016. "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies," Journal of Financial Stability, Elsevier, vol. 26(C), pages 31-44.
    2. Morgan, Peter J. & Regis, Paulo José & Salike, Nimesh, 2019. "LTV policy as a macroprudential tool and its effects on residential mortgage loans," Journal of Financial Intermediation, Elsevier, vol. 37(C), pages 89-103.
    3. Richter, Björn & Schularick, Moritz & Shim, Ilhyock, 2019. "The costs of macroprudential policy," Journal of International Economics, Elsevier, vol. 118(C), pages 263-282.
    4. Ilhyock Shim & Bilyana Bogdanova & Jimmy Shek & Agne Subeltye, 2013. "Database for policy actions on housing markets," BIS Quarterly Review, Bank for International Settlements, September.
    5. Terhi Jokipii & Reto Nyffeler & Stéphane Riederer, 2021. "Exploring BIS credit-to-GDP gap critiques: the Swiss case," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 157(1), pages 1-19, December.
    6. Kim, Soyoung & Mehrotra, Aaron, 2022. "Examining macroprudential policy and its macroeconomic effects – Some new evidence," Journal of International Money and Finance, Elsevier, vol. 128(C).
    7. Peter C. B. Phillips & Zhentao Shi, 2021. "Boosting: Why You Can Use The Hp Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 521-570, May.
    8. Minsoo Lee & Ruben Carlo Asuncion & Jungsuk Kim, 2016. "Effectiveness of Macroprudential Policies in Developing Asia: An Empirical Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(4), pages 923-937, April.
    9. Zhang, Ailian & Pan, Mengmeng & Liu, Bai & Weng, Yin-Che, 2020. "Systemic risk: The coordination of macroprudential and monetary policies in China," Economic Modelling, Elsevier, vol. 93(C), pages 415-429.
    10. Perry Warjiyo, 2017. "Indonesia: the macroprudential framework and the central bank’s policy mix," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy frameworks, implementation and relationships with other policies, volume 94, pages 189-205, Bank for International Settlements.
    11. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    12. repec:idn:journl:v:18:y:2016:i:4:p:1-30 is not listed on IDEAS
    13. Carlos Cantu & Leonardo Gambacorta & Ilhyock Shim, 2020. "How effective are macroprudential policies in Asia Pacific? Evidence from a meta-analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Measuring the effectiveness of macroprudential policies using supervisory bank-level data, volume 110, pages 3-15, Bank for International Settlements.
    14. Soyoung Kim & Aaron Mehrotra, 2018. "Effects of Monetary and Macroprudential Policies—Evidence from Four Inflation Targeting Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 967-992, August.
    15. James D. Hamilton, 2018. "Why You Should Never Use the Hodrick-Prescott Filter," The Review of Economics and Statistics, MIT Press, vol. 100(5), pages 831-843, December.
    16. Zohair Alam & Mr. Adrian Alter & Jesse Eiseman & Mr. Gaston Gelos & Mr. Heedon Kang & Mr. Machiko Narita & Erlend Nier & Naixi Wang, 2019. "Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database," IMF Working Papers 2019/066, International Monetary Fund.
    17. Kim, Soyoung & Oh, Junbeom, 2020. "Macroeconomic effects of macroprudential policies: Evidence from LTV and DTI policies in Korea," Japan and the World Economy, Elsevier, vol. 53(C).
    18. Chulho Jung & Jay E. Ryu, 2020. "The price puzzle revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 27(6), pages 441-446, March.
    19. Zhang, Longmei & Zoli, Edda, 2016. "Leaning against the wind: Macroprudential policy in Asia," Journal of Asian Economics, Elsevier, vol. 42(C), pages 33-52.
    20. Ono, Arito & Uchida, Hirofumi & Udell, Gregory F. & Uesugi, Iichiro, 2021. "Lending pro-cyclicality and macroprudential policy: Evidence from Japanese LTV ratios," Journal of Financial Stability, Elsevier, vol. 53(C).
    21. Harry Aginta & Masakazu Someya, 2022. "Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-25, December.
    22. Rani Wijayanti & Nur M Adhi P & Cicilia A Harun, 2020. "Effectiveness of macroprudential policies and their interaction with monetary policy in Indonesia," BIS Papers chapters, in: Bank for International Settlements (ed.), Measuring the effectiveness of macroprudential policies using supervisory bank-level data, volume 110, pages 31-50, Bank for International Settlements.
    23. Soyoung Kim, 2019. "Macroprudential Policy in Asian Economies," Working Papers id:13036, eSocialSciences.
    24. Gabriel Bruneau & Ian Christensen & Césaire Meh, 2018. "Housing market dynamics and macroprudential policies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 864-900, August.
    25. Cheng, Ruijie & Rajan, Ramkishen S., 2022. "House price decoupling in East Asia and the Pacific: Trilemma versus dilemma revisited," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 518-539.
    26. International Monetary Fund, 2011. "Macroprudential Policy: What Instruments and How to Use them? Lessons From Country Experiences," IMF Working Papers 2011/238, International Monetary Fund.
    27. Sui, Jianli & Liu, Biying & Li, Zhigang & Zhang, Chengping, 2022. "Monetary and macroprudential policies, output, prices, and financial stability," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 212-233.
    28. Luangaram, Pongsak & Thepmongkol, Athakrit, 2022. "Loan-to-value policy in a bubble-creation economy," Journal of Asian Economics, Elsevier, vol. 79(C).
    29. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575, October.
    30. Kim, Jihae & Kim, Soyoung & Mehrotra, Aaron, 2019. "Macroprudential policy in Asia," Journal of Asian Economics, Elsevier, vol. 65(C).
    31. Jung, Hosung & Lee, Jieun, 2017. "The effects of macroprudential policies on house prices: Evidence from an event study using Korean real transaction data," Journal of Financial Stability, Elsevier, vol. 31(C), pages 167-185.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mokas, Dimitris & Giuliodori, Massimo, 2023. "Effects of LTV announcements in EU economies," Journal of International Money and Finance, Elsevier, vol. 133(C).
    2. Dimitris Mokas & Massimo Giuliodori, 2021. "Effects of LTV announcements in EU economies," Working Papers 704, DNB.
    3. Victor Pontines, 2021. "The real effects of loan-to-value limits: empirical evidence from Korea," Empirical Economics, Springer, vol. 61(3), pages 1311-1350, September.
    4. Kim, Soyoung & Oh, Junbeom, 2020. "Macroeconomic effects of macroprudential policies: Evidence from LTV and DTI policies in Korea," Japan and the World Economy, Elsevier, vol. 53(C).
    5. Nakatani, Ryota, 2020. "Macroprudential policy and the probability of a banking crisis," Journal of Policy Modeling, Elsevier, vol. 42(6), pages 1169-1186.
    6. Norring, Anni, 2022. "Taming the tides of capital: Review of capital controls and macroprudential policy in emerging economies," BoF Economics Review 1/2022, Bank of Finland.
    7. Raksmey, Uch & Lin, Ching-Yang & Kakinaka, Makoto, 2022. "Macroprudential regulation and financial inclusion: Any difference between developed and developing countries?," Research in International Business and Finance, Elsevier, vol. 63(C).
    8. Zhong, Changbiao & Xie, Lijuan & Shi, Yu & Xu, Xiangyun, 2023. "Macro-prudential policy, its alignment with monetary policy and house price growth: A cross-country study," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 51-62.
    9. Marcin Czaplicki, 2022. "Measuring the restrictiveness of (macro)prudential policy: the case of bank capital regulation in Poland," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(3), pages 322-338, September.
    10. Kim, Soyoung & Shim, Seri & Chen, Hongyi, 2023. "Effects and Conduct of Macroprudential Policy in China," Journal of Financial Stability, Elsevier, vol. 66(C).
    11. Eller, Markus & Hauzenberger, Niko & Huber, Florian & Schuberth, Helene & Vashold, Lukas, 2021. "The impact of macroprudential policies on capital flows in CESEE," Journal of International Money and Finance, Elsevier, vol. 119(C).
    12. Ms. Juliana Dutra Araujo & Manasa Patnam & Ms. Adina Popescu & Mr. Fabian Valencia & Weijia Yao, 2020. "Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates," IMF Working Papers 2020/067, International Monetary Fund.
    13. Elien Meuleman & Rudi Vander Vennet, 2022. "Macroprudential Policy, Monetary Policy, and Euro Zone Bank Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 18(4), pages 1-52, October.
    14. Yang, Jin Young & Suh, Hyunduk, 2023. "Heterogeneous effects of macroprudential policies on firm leverage and value," International Review of Financial Analysis, Elsevier, vol. 86(C).
    15. Coulier, Lara & De Schryder, Selien, 2024. "Assessing the effects of borrower-based macroprudential policy on credit in the EU using intensity-based indices," Journal of International Money and Finance, Elsevier, vol. 142(C).
    16. He, Dongwei & Wu, Yifan & Wang, Yifan & Xing, Xueyan, 2023. "Prudential regulation and bank performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    17. Maria Chiara Cavalleri & Boris Cournède & Volker Ziemann, 2019. "Housing markets and macroeconomic risks," OECD Economics Department Working Papers 1555, OECD Publishing.
    18. Kim, Jihae & Kim, Soyoung & Mehrotra, Aaron, 2019. "Macroprudential policy in Asia," Journal of Asian Economics, Elsevier, vol. 65(C).
    19. Uwe Vollmer, 2022. "Monetary policy or macroprudential policies: What can tame the cycles?," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1510-1538, December.
    20. Kumar, Sanjiv & Prabheesh, K.P. & Bashar, Omar, 2022. "Examining the effectiveness of macroprudential policy in India," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 91-113.

    More about this item

    Keywords

    Macroprudential policy; Loan-to-value policy; Structural vector autoregressive models; Financial stability;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:eurase:v:13:y:2023:i:3:d:10.1007_s40822-023-00244-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.