Credit Cycle, Capital Flow and Effectiveness of the Macroprudential Policy in Indonesia

Abstract

Macroprudential policy is used to minimize the occurrence of systemic risk in the financial system. This study aims to measure the effectiveness of macroprudential policy instruments to mitigate the impact of fluctuations in capital flows to the movement of private sector credit cycle. The study also measures the effectiveness of macroprudential policy instruments to mitigate the impact of fluctuations in the business cycle of the movement of private sector credit cycle. Macroprudential policy instruments consist of, the Loan to Value (LTV), the minimum reserve requirement (GWM), and GWM + Loan to Deposit Ratio (GWM + LDR). The analytical method used is Correction Error Vector Model (VECM). The data used is data time series starting in 1998.Q1 until 2016.Q. The empirical test results show that macroprudential policy instruments such as LTV and GWM + LDR effective to reduce the impact of capital flow to movements in the credit cycle. While the reserve requirement policy is not effective to mitigate the impact of capital flows on the credit cycle. Meanwhile, LTV policy, the reserve requirement and reserve requirement + LDR are not effective to mitigate the impact of the business cycle movement against the credit cycle.