General Equilibrium Consequences of Indonesian Bank Regulatory Reform: Theory, Data, and Application of a Financial Computable General Equilibrium Model of The Indonesian Economy

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Rasyid, Arief Adrianto (2022) General Equilibrium Consequences of Indonesian Bank Regulatory Reform: Theory, Data, and Application of a Financial Computable General Equilibrium Model of The Indonesian Economy. PhD thesis, Victoria University.


Over the last thirty years, Indonesia has undertaken a series of financial reforms to unlock the potential of financial development for economic growth. Before the 1997 Asian Financial Crisis (AFC), three major financial reforms were highlighted. The first was the June 1983 banking deregulation package, known as Pakjun 83, which modernised banking operations by liberalising commercial bank decisions on interest rates and credit provision. The second reform was the October 1988 (Pakto 88) policy package which significantly relaxed new bank licencing and scope of business, with particular focus on liberalising the banking sector’s ability to manage their foreign liabilities. The third reform was the enactment of the 1992 Indonesian banking law (Law No.7 1992) to strengthen the bank prudential framework. Despite efforts to develop and implement a prudential framework, the collapse of the Indonesian banking system during the AFC was one of the worst in the history of banking in emerging economies. In the global financial crisis (GFC) in 2008, Indonesia experienced a substantial capital outflow from its financial system. However, the overall financial system remained intact. This thesis uses a financial computable general equilibrium (FCGE) model, AMELIA-F, to evaluate the impacts of Indonesian financial reforms on the economy and financial stability. AMELIA-F is composed of two major parts: First, the real-side of the model, representing the real dynamic CGE model. This part contains equations that outline how traditional economic agents, like households, industries, investors and the public sector, adjust their consumption bundles, and set production structures. Second, the financialside of the model. This part describes how financial agents in Indonesia set both their capital structures and financial asset allocations. The real- and financial-sides of the model are connected via multiple channels. When these channels are activated, the realand financial-sides constrain and influence each other in a general equilibrium framework. Using AMELIA-F, this thesis investigates two important financial reforms in Indonesia. First, it evaluates a 100 basis point increase in bank capital adequacy ratios (CAR). The results show that the reform has small, negative consequences for the economy. The commercial banks experience a balance sheet reduction as they move away from riskier assets and finance more of their activity by equity rather than debt. This negatively impacts the capacity of industry and housing developers to invest in physical capital formation and economic growth. However, the reforms aids financial stability via: (i) a fall of bank debt-to-equity ratios; (ii) attenuated bank risk-taking behaviour; and (iii) lower economy-wide private debt to income ratio. Second, this thesis assesses a 100 basis point increase in bank net open position (NOP), to represent a capital account relaxation policy. The results suggest small gains for the Indonesian real economy, measured as increases in real investment and GDP relative to baseline forecasts. Net foreign capital inflows in each case cause exchange rate appreciation, which causes small reductions in the central bank policy rate.

Item type Thesis (PhD thesis)
Subjects Current > FOR (2020) Classification > 3801 Applied economics
Current > FOR (2020) Classification > 3802 Econometrics
Current > Division/Research > Centre of Policy Studies (CoPS)
Keywords Indonesia, FCGE model, AMELIA-F, financial reforms, economy, financial stability, capital adequacy ratios, net open position
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