The Transmission Mechanism and Policy Responses to Global Monetary Developments

Download or read book The Transmission Mechanism and Policy Responses to Global Monetary Developments written by Perry Warjiyo and published by . This book was released on 2014 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: This note describes Indonesia's experiences of the monetary policy transmission mechanism and the country's policy responses to global monetary developments, with a focus on the period following the Federal Reserve's announcement in May 2013 of its plans to begin tapering its quantitative easing measures. The Fed's unconventional monetary policy and its normalisation process have given rise to the policy “trilemma” of trying to find the optimal interest rate response while maintaining exchange rate flexibility and managing capital flows. In the case of Indonesia, we have managed this “trilemma” through a mix of monetary and macroprudential policies. Clear communication, policy coordination with the government on inflation, fiscal and structural reforms, as well as central bank cooperation on strengthening regional financial arrangements have also played a crucial role in these efforts.Three particular issues are discussed here. First, the setting of interest rates supported by exchange rate flexibility and capital flow management in response to the policy “trilemma” arising from global monetary developments. Second, the efficacy of macroprudential measures in reinforcing the lending channel of the monetary policy transmission mechanism on the back of volatile capital flows and an underdeveloped financial market. Third, the importance to domestic monetary and financial system stability of financial market deepening through its role in smoothing out the transmission of global monetary developments. The note concludes with an agenda for further strengthening macroeconomic stability in the short term and for accelerating reforms to promote sustainable and balanced growth in the medium term.Full publication: "http://ssrn.com/abstract=2498104" target="_blank" The Transmission of Unconventional Monetary Policy to the Emerging Markets.