Credit Cycle, Capital flow and Effectiveness of The Macroprudential Policy in Indonesia

Abstract

Macroprudential policy is the policy implemented to minimize systemic risk over financial system. Procyclical credit development flow offers systemic risk potential over banking system. The research aims at exploring the effectiveness of macroprudential policy to mitigate fluctuates impact of capital flow and business cycle over credit cycle flow of private sectors. Macroprudential policy consists of Loan to Value (LTV), statutory reserve requirement (GWM), and GWM + Loan to Deposit Ratio (GWM+LDR). The analysis method deployed is Vector Error Correction Model (VECM) to identify the effectiveness of macoprudential policy to mitigate the impact of capital flow and business cycles over fluctuates credit cycles of private sectors with additional surprising variables such as BI (Bank of Indonesia) rate, real Gross Domestic Product (GDP) and real exchange rate. The data used was time series data starting from 1998.Q1 to 2016.Q. Empirical test result shows that macroprudential policy such as LTV and GWM+LDR are remarkably effective to mitigate capital flow impact over credit cycle flow while GWM policy did not indicate the same effectiveness to mitigate capital flow impact over credit cycles. Similarly, LTV, GWM and GWM+LDR policy are not effective to mitigate the impact of business cycle flow over credit cycles.