MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA

Authors

Akhis R. Hutabarat

Document Type

Article

Abstract

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.

Recommended Citation

Hutabarat, Akhis R. (2011) "MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA," Bulletin of Monetary Economics and Banking: Vol. 13: No. 4, Article 9.
DOI: https://doi.org/10.21098/bemp.v13i4.267
Available at: https://bulletin.bmeb-bi.org/bmeb/vol13/iss4/9

First Page

1

Last Page

34

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Country

Indonesia

Affiliation

Bank Indonesia