Open AccessMONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA
Author(s) -
Akhis R. Hutabarat
Publication year - 2011
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 4
ISSN - 2460-9196
DOI - 10.21098/bemp.v13i4.267
Subject(s) - economics , monetary policy , monetary economics , exchange rate , disinflation , interest rate , shock (circulatory) , depreciation (economics) , credit channel , exchange rate pass through , risk premium , interest rate parity , inflation targeting , microeconomics , medicine , profit (economics) , capital formation , financial capital
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.Keywords: Exchange rate, Balance of Payment, Monetary transmission and policy, Dynamic General Equilibrium.JEL Classification: F41; E52; D58