Scope of the Paper
2
1. Introduction
2. Behavioural Change in the Financial System
3. The Monetary Policy Transmission Mechanism: the Role of Risk Perception
4. Financial System and Monetary Policy in Indonesia 4. Financial System and Monetary Policy in Indonesia
5. Policy Implication: General View
6. Conclusion
1. Salient Aspect Arise in Global Financial Crises...
Rapid and deep propagation of th he impact of the current financial crisis
– The considerable change of global economic environment compared to the
brazen confidence of the 1990s
– The rapidly changing financial system coupled with its innovative
development as the main engine
Increasing the complexity of monetary policy management
3
Reorientation of the central bank policy ...
– not only expands the scope of existing policy, but also
– enables a shift in policy paradigm to adjust to the changes in the economic
environment
Factors contributing the change in global financial system ...
4
Real Interet Rate
Three factors precipitate shifts in the global financial system:
1. innovative development of information and technology 2. deregulation of supporting financial systems
3. conducive global macroeconomic conditions, including low real interest rate
The shifts in the global financial system have not been independent from the financial system characteristics .... that tend to be pro-cyclical
Source: IMF
2. Behavioral Changes in the Global Financial System
Risk Management
The preferrence to hedge and diversify risk, as well as transfer risk to other financial institutions more rapidly
The ability to manage risk relates to the decline in liquidity risk along with more liquid financial institutions
The ability to manage risk is developing in line with the rise in financial product innovation that can accommodate risk diversification such as
credit derivative products
Changes Features
The ability to accumulate and distribute funds increased rapidly
5
Operational Activity
- Due to the fact that the capacity of financial institutions to expand their businesses is less constraint from using available funds
Differs entirely from the old characteristics of financial institutions where fund distribution was highly influenced by the actual funds
available
Improved the ability of the financial institutions to separate the two primary functions of bank: the origination and holding of credit risk
Pattern of Financial Institution Integration
Horizontal Integration
Integration between the stock and bonds markets Facilitated greater capital mobility between countries
Type of Integration Features
6
The change also occurred in the type of financial institution integration ...
Vertical
Integration between the role and the function of financial institutions
Involved a blurring of the boundaries of the financial services
Vertical Integration
Involved a blurring of the boundaries of the financial services offered by each type of financial institution
Products offered by banks, insurance companies, the money market and the capital market shared similar characteristics and
were often difficult to differentiate
Diagonal Integration
Integration between the financial and commodity markets In line with financial product innovation involving activities in the
commodity market
The value of commodity derivatives has skyrocketed in the last 10 years, from USD400 billion in 1998 to USD9 trillion at the end
of 2007 Jenkison et al, 2008
Changes in financial system and monetary policy
Monetary Policy Transmission Mechanism
Significant changes in the financial system affected the understanding of the policy transmission channel and monetary policy management
- The role of risk perception increased and dominate monetary policy transmission
- Monetary policy management become more complex both in terms of the increasing role
of risk perception and also due to the unusual financial market integration process
7
+ +
+ +
, ,
, ,
- -
- -
. .
. .
. .
. .
+ +
+ +
1 1
1 1
Risk Taking Channel ?
+ +
+ +
, ,
, ,
- -
- -
. .
. .
. .
. .
+ +
+ +
1 1
1 1
+ +
+ +
, ,
, ,
- -
- -
. .
. .
. .
. .
+ +
+ +
1 1
1 1
Risk Taking Channel ?
3. Risk Perception and Monetary Transmission Mechanism
