Fajar Oktiyanto

PhD Candidate in Economics at Research School of Economics, The Australian National University

Research Interest: Macroeconomics, Development Economics, Monetary Economics







Monetary and Macroprudential Policy Mix under Financial Frictions Mechanism with DSGE Model

This research develops a DSGE model for Indonesia's small open economy, complemented by financial frictions in the form of collateral constraints amongst households and a financial accelerator amongst entrepreneurs. Including the banking sector in the model enables analysis of the policies required to mitigate shocks originating in the banking sector or other shocks and their influence on financial intermediaries in the form of banks in the economy.

The model demonstrates that shocks in the banking sector, for instance, raising the CAR requirement, impact the real sector through the credit channel, which undermines GDP and lowers the inflation rate. The financial accelerator mechanism in the model evidence procyclicality in the financial system to economic conditions. An economic contraction elicits a response from the banking industry to reduce the amount of credit allocated, which is the root of the risk faced by the banks. In the face of rising ex-post idiosyncratic shocks, exceeding those ex-antes indicates that bank assessments of an entrepreneur's expected return on capital are more significant than the actual realization, forcing banks to bear the risk. Such conditions encourage banks to reduce credit disbursement to avoid eroding bank capital.

The simulations show that a policy mix of monetary and macroprudential policy not only achieves sustainable GDP and stable inflation but also helps to control consumption, thereby reducing demand for imported goods. Coupled with stable exports, a slowdown in imports will have a favourable effect on the current account.

The Effects of Income Taxation: Indonesia Case

This study evaluates the effects of Indonesia's income taxation on key macroeconomic variables and its impacts on consumption and leisure distribution using the Overlapping Generations (OLG) model. It was found that the reduction in marginal labour income tax by 20% will positively impact the output, aggregate consumption, capital stock, and labour supply, but the consumption distribution and leisure distribution are getting more unequal, hence the total welfare decrease. An increase in marginal labour income tax for the same amount makes equal consumption distribution and leisure distribution that compensate for lower output, aggregate consumption, capital stock and labour supply, so the welfare increase. Without consumption tax, the labour income tax is significantly higher, which causes significantly lower macroeconomic variables. In this scenario, better consumption and leisure distribution are not enough to compensate for lower key macroeconomic variables and lower the total welfare.

Distributional Effect of Public Education: Indonesia Case

This study evaluates the effect of the government's increased public education on the distribution in Indonesia. Increased public education spending will lower inequality if the parents directly contribute to forming their children's human capital through effective parental time. More effective parental time will dominate direct education, creating an equal distribution. Different scenarios when the parent does not contribute significantly to forming their children's education show different results. An increase in public education spending by the government will increase inequality. When parents do not have enough effective parental time to educate their children, the indirect social security effect dominates. This effect represents how increased public spending will lower the after-income tax and the social security budget. Lower government transfer creates higher inequality.

Interbank Market with DSGE Model

In this study, we built the DSGE model for Indonesia's small open economy, equipped with an interbank market mechanism to describe financial frictions from the supply side of banks. Banks use a portfolio optimization mechanism between channelling credit or saving in risk-free assets. In contrast, financial friction on the demand side is modelled with collateral constraints and financial accelerators.

The simulation results show that the shock in the interbank market will affect banks' general condition, especially in bank capital, CAR, and loan-to-deposit ratio (LDR). The condition of the Bank's balance sheet will affect the real sector. This model can also capture procyclicality and financial accelerators due to financial frictions in the economy, where GDP will be higher during the expansion phase compared to conditions without financial frictions, and vice versa, where GDP will be lower during the contraction phase. Banks will respond to the contraction in the economy by reducing the level of lending due to the high risk faced by banks, which will also increase bank lending rates so that entrepreneurs find it increasingly difficult to receive loans. This condition makes the Bank increasingly put pressure on lending to prevent the erosion of the Bank's capital.

The simulation results show that a shock in the form of a policy mix of monetary and macroprudential policies will suppress credit growth more deeply compared to conditions without macroprudential policies. GDP and inflation decreased but did not change much compared to conditions using only the BI rate policy. Using the policy mix, the decline in consumption is offset by a decrease in imports so that GDP tends to be stable. The policy mixes also resulted in stable inflation.

Balance of Payment Indonesia Model

This study has built the Balance of Payments Indonesia Model for Assessments with a simultaneous equation approach. The two-step Error Correction Model (ECM) econometric method is used to estimate all equations. The modelled components are also more detailed, especially for the current account block, so it is expected to make storytelling easier for model users.

The simulation results show that the model aligns with the existing economic theory. The forecast error of the model is also relatively small, especially for the components in the current account section. Simultaneous equations in the model make it possible to see changes in current and financial accounts' impact on other macroeconomic variables.

Although the model involves many equations, it has been developed by automating the process of data input, estimation and running the model so that the level of difficulty in maintaining the consistency of the relationships between variables in the model is low.

The Determinant of Core Inflation in Indonesia

This paper analyses the factors influencing core inflation in Indonesia using the OLS model and quarterly data (q-to-q). We argue that in the period after the 1997/1998 economic crisis, core inflation was influenced by past (backward-looking) core inflation, inflation expectations (consensus forecast), output gap, the exchange rate (change and level of volatility), and M1 growth. Compared to the whole sample (1992-2011), in the period after the economic crisis, the role of the output gap became significant, the exchange rate pass-through was reduced, and the role of exchange rate volatility became larger. Using the output gap MV filter, it was found that there was a threshold output gap after a crisis period.

Meanwhile, the role of the policy rate (BI rate) in reducing core inflation is relatively limited. Using the ARDL model and monthly data (YoY) from January 2002 to June 2011, we argue that the movement of administered price inflation and volatile food inflation affects the movement of core inflation in Indonesia. In general, the impact of increases in volatile foods is more significant than the impact of increases in administered prices on core inflation. Several administered price commodities significantly impact core inflation are gasoline, urban transportation, household fuel, and telephone tariffs. Meanwhile, several volatile food commodities that significantly impacted core inflation were rice, beef, milk, noodles, and cooking oil.

Output Gap Estimate in Indonesia

This paper estimates the output gap in Indonesia for the whole nation and seven provinces, namely Jakarta, West Java, Central Java, East Java, Bali, West Sumatra and South Sumatra. Estimation is done using a multivariate filter, adjusted HP filter, and peak-to-peak method from 1990 to 2011.

In general, the results of the national output gap at the end of 2011 show a negative value, meaning that the level of real output is still below its potential. However, the direction of the output gap is an upward slope approaching zero. The movement of the output gap in most provinces also shows an increasing trend. The movement of real GDP in Indonesia after the 1997/1998 crisis was likely to follow its trend and did not have a long cycle. As a result, the movement of the output gap is around zero, with the range of -1.3% to 1.2%.

Although the measurement of the output gap contains high uncertainty, through the estimation of Phillips curve, output gap variable indicates a significant relationship with CPI inflation both in the whole observation and in the period after the crisis. The method of calculation of the adjusted output gap with the HP filter and the peak-to-peak, though simple, can complement the MV filter output gap and other indicators in assessing the state of the Indonesian economy.



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Email: fajar.oktiyanto@anu.edu.au
Email: fajar_o@bi.go.id
Linkedin: fajaroktiyanto

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