• The Journal of Asian Finance, Economics and Business
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• v.8 no.1
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• pp.833-840
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• 2021

This paper examines the effect of the interest rate set by Bank Indonesia on financial system stability as measured by the credit gap in Indonesia for quarterly data for the period 1976 Q1 to 2019 Q4. We suppose that the relationship between the Central Bank rate and the credit gap is non-linear. Hence, this study applies a smooth transition regression (STR) model to investigate the relationship between these variables. Our results are: first, by performing STR estimation we obtained a threshold level of Central Bank rate of 2.01. Second, a decrease in the Central Bank rate results in a reduction in the credit gap when the Central Bank rate is above or below the threshold level. The effect of the Central Bank rate is five times greater for the high regime than for the low regime. Third, we find evidence that the effect of the exchange rate, economic growth, inflation, and GDP per capita on the credit gap for the high regime is the opposite of the low regime. We suggest that policymakers need to keep the Central Bank interest rate low and stable so that the role of the bank as a financial intermediary remains stable and conducive to strengthening financial stability.

• Korea Trade Review
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• v.47 no.2
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• pp.103-120
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• 2022

This paper studies the possibility of options as an instrument for central bank to intervene foreign exchange market. As opposed to spot transaction or forward transaction, which impacts spot exchange rate only once, currency options can continuously resist a directional speculative pressure on spot market due to the dynamic delta hedging of OTC currency options market maker. This research also analyzes whether and how central banks can use currency options to lower exchange rate volatility and maintain (implicit) target zones in foreign exchange markets. It argues that short position rather than long position in options will result in market makers dynamically hedging their long option exposure in a stabilizing manner, consistent with the first objective. Selling a "Strangle" allows a central bank to increase the credibility of its commitment to a target zone, and could have a lower expected cost than spot market interventions. However, this strategy also exposes the central bank to an unlimited loss potential. Therefore these kinds of intervention strategies must be used in the short run and temporarily.

• East Asian Economic Review
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• v.22 no.4
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• pp.507-529
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• 2018

This paper evaluates the whole impact of quantitative easing on inflation in Korea implemented by the central banks in four major advanced economies, the U.S., Euro Area, U.K. and Japan. According to the analysis employing a VAR-X model with the security holdings of those central banks an exogenous variable, quantitative easing is estimated to exert downward pressures on inflation in Korea. Considering the impulse responses of Korean macroeconomic variables to a quantitative easing shock, the spillover effect is transmitted through exchange rate channel while trade channel turns out to be ineffective. In an additional analysis assessing the impact of each quantitative easing program of the central banks, only those of the Fed and European Central Bank are estimated to be significant. The empirical results prove to be robust even if using long-term interest rates as an alternative indicator of quantitative easing.

• Journal of Distribution Science
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• v.12 no.3
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• pp.99-103
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• 2014

Purpose - The objective of this study was to examine the volatility of the exchange rate of the Somali shilling (SoSh) during 2010, especially the exchange rate between the Somali shilling and US dollar. Research design, data, and methodology - The study employed aquantitative research design; the data was analyzed using contents analysis for the data pertaining to the exchange rate between the US dollar and Somali Shilling in 2010. Results - The main findings were that the exchange rate was very volatile during 2010 because of three sources: (1) Imbalance of demand and supply in the money market, (2) People adopting the US dollar as the medium of exchange forgoods and services, thereby reducing the circulation of the SoSh, and (3) Lack of a strong central bank. Conclusions - The study suggested three possible remedies: the establishment of an effective central bank that matches the demand and supply of the currencies, adoption of the Somali shilling as the official currency base for the prices of commodities, and minimizing the imports into the country and maximizing its exports, to support the strengthening of the Somali shilling.

• The Journal of Asian Finance, Economics and Business
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• v.6 no.2
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• pp.269-275
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• 2019

This study intended to examine the relationship between inflation and unemployment rate in Indonesia during 1987 to 2018 period. The study applied a quantitative method using Vector Error Correction Model (VECM) in order to comprehensively understand the causality between inflation and unemployment rates. The data were collected from various main sources including the World Bank, Central Bank of Indonesia, and Central Bureau of Statistics (BPS). The findings showed that inflation has a one-way relationship toward unemployment in Indonesia and it occurs at the third lag. Impulse Response Function (IRF), shows that the inflation rate are fluctuating in response to the shock of unemployment. The unemployment rate responses to shocks from inflation initially increased until it is eventually diminished. It shows that the shocks caused by the impact of inflation were only in the short term. Further, inflation in the three previous lags will have consequences for the unemployment rate in the year. Lastly, both in the long run and short run, unemployment did not affect inflation rates. These findings suggest that high inflation in Indonesia is determined the rising price of basic commodities and fuel. In addition, most companies in Indonesia applying capital intensive so that employment growth in Indonesia is small.

• KDI Journal of Economic Policy
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• v.46 no.1
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• pp.91-129
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• 2024

The Bank of Korea, through a legal amendment in 2011 following the financial crisis, was entrusted with the additional responsibility of financial stability beyond its existing mandate of price stability. Since then, concerns have been raised about the prolonged increase in household debt compared to income conditions, which could constrain consumption and growth and increase the possibility of a crisis in the event of negative economic shocks. The current accumulation of financial imbalances suggests a critical period for the government and central bank to be more vigilant, ensuring it does not impede the stable flow of our financial and economic systems. This study examines the applicability of the Integrated Inflation Targeting (IIT) framework proposed by the Bank for International Settlements (BIS) for macro-financial stability in promoting long-term economic stability. Using VAR models, the study reveals a clear increase in risk appetite following interest rate cuts after the financial crisis, leading to a rise in household debt. Additionally, analyzing the central bank's conduct of monetary policy from 2000 to 2021 through DSGE models indicates that the Bank of Korea has operated with a form of IIT, considering both inflation and growth in its policy decisions, with some responsiveness to the increase in household debt. However, the estimation of a high interest rate smoothing coefficient suggests a cautious approach to interest rate adjustments. Furthermore, estimating the optimal interest rate rule to minimize the central bank's loss function reveals that a policy considering inflation, growth, and being mindful of household credit conditions is superior. It suggests that the policy of actively adjusting the benchmark interest rate in response to changes in economic conditions and being attentive to household credit situations when household debt is increasing rapidly compared to income conditions has been analyzed as a desirable policy approach. Based on these findings, we conclude that the integrated inflation targeting framework proposed by the BIS could be considered as an alternative policy system that supports the stable growth of the economy in the medium to long term.

• Asian Journal of Business Environment
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• v.10 no.1
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• pp.29-36
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• 2020

Purpose: This study aims to analyze the effect of macroeconomic and non-macroeconomic determinants of capital flight. Research design, data and methodology: With five determinants, this survey was conducted by Eviews 10, and the ordinary least squares (OLS) as a statistical method was applied for examining the research hypothesis. The five determinants are a budget deficit, economic growth, inflation rate, the exchange rate, and sovereign rating. The capital flight measurement uses the World Bank residual approach. The data derive from the Central Bank of Indonesia, BPS-Statistics Indonesia, OECD, and Moody's Investor Service. Results: The result considers that economic growth, the exchange rate, and the sovereign rating will decrease capital flight. In addition, the budget deficit and the inflation rate will increase capital flight. The sovereign rating decreases capital flight bigger than the other determinants. In addition, the exchange rate is statistically significant. Conclusions: The most influential problem of capital flight in Indonesia is because of non-macroeconomics factor political issue, corruption, bad regulation, and others. That's why the investment climate in Indonesia is still not secure. We propose that the regime would have to amend the business rule for reducing capital, raising the investment climate, and demonstrating the creative industry.

• East Asian Economic Review
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• v.28 no.2
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• pp.221-244
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• 2024

This study examines how the independence of monetary policy changes in situations where the interest rate differential between domestic and foreign rates inverts, utilizing the trilemma indices. For analysis, this paper uses the trilemma indices developed by Kim et al. (2017) to analyze the relationship between the monetary policy independence index and the other two trilemma indices, namely the capital account openness index and the exchange rate stability index, across 45 countries from 2002 to 2018. The analysis reveals that the trilemma's validity is contingent. In particular, no statistically significant negative correlation was found between the monetary policy independence index and exchange rate stability index during periods of interest rate differential inversion. A positive correlation emerges between exchange rate stability and the independence of monetary policy, particularly when the inverted interest rate differential exceeds a certain threshold. This situation, where the exchange rate remains stable despite low domestic interest rates, implies that the central bank is effectively managing monetary policy to appropriately respond to economic conditions, which is reflected in the monetary policy independence index.

• Journal of International Area Studies (JIAS)
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• v.14 no.2
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• pp.499-524
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• 2010

The purpose of this study is to based on review of theoretical and empirical studies to assess the independence of central banks - the former Socialist republics, including the Russian Federation and Czech, Poland. In addition, the work is expected to clarify whether a link exists between independence and the most important economic indicators such as inflation, economic activity, the budget deficit. And The subject of this study are the formal and actual independence of national banks, as well as limiting factors: political and economic. Background investigation of the problem of independence of central banks from the fact that, according to many economists, it is essential to the successful development of a market economy. The effectiveness of any country's economy due to currency volatility, low inflation, high reliability of the banking system, etc. As far as the independence of monetary regulation contributes to these goals - one of the most actively debated issues in the world of economic theory and practice for a long time. The issue of central bank independence is extremely important for Russia, Czech, Poland. In the near future to the central bank has important tasks, among which are the transition to inflation targeting in the rejection of significant intervention in the foreign exchange market, as well as improving the sustainability of the national banking system. Transparency and independence of the Bank of Russia, Czech Republic, Poland, in my view, should be an important factor in achieving these goals. The countries of Czech Republic, Poland have already made a number of steps to bring the status of their banks to the European standards. Many other developing countries are also in the process of reforming their central banks and the improving conditions of their functioning. However, despite the fact that as a model for reform used by the central banks of countries with developed market economies, central banks in developing countries are still yet deprived of the legal, economic and political independence. A different situation exists in transition space. Because of significant differences in the views of the authorities in transition republics at the necessary level of independence of central banks and the exchange rate and monetary policy reform of monetary management in these countries led to different results.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.10
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• pp.239-247
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• 2021

Central Bank authorities should carefully manage inflation rate uncertainties to achieve economic growth and development not only in the short-run but also in the long-run. Since inflation is a key macroeconomic variable, an increased understanding about its behavior is undoubtedly important. Thus, paper employs unit root with breakpoints to examine the mean reverting behavior of inflation rate in the Philippines using monthly data from 2002 to 2020. Empirically, the unit root breakpoint innovational and additive outlier tests favor the stationarity or mean reverting behavior of inflation in the Philippines. Also, results of standard unit root tests, ADF, PP, GLS-Dickey-Fuller, KPSS and NP, provide strong evidence of mean reverting processes. The mean reverting behavior of inflation rate reveals that the monetary policy using inflation targeting framework has succeeded in reducing chronic inflation persistence in the Philippines. Thus, this research supports inflation targeting policy that aims to maintain general price level stability for the Philippine economy's long-term growth and development prospects. The findings of this research remain important for the central bankers for not only providing them better understanding about the behavior of inflation rate, but also helping them formulate and implement policy reforms related to money, credit and banking.