CONTEMPORARY CHALLENGES FOR MONETARY POLICY IN A DEVELOPING COUNTRY

Author

• Amri Anjas Asmara, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2026

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Gilbert, Scott

Abstract

Following the periods of COVID-19 crisis, central banks in developing countries have faced a formidable set of interrelated challenges that stretch the limits of conventional frameworks. Accordingly, this study discusses different issues related to monetary policy in Indonesia, a developing country with bank-based financial system. The first chapter argues that monetary policy setting needs a framework that accounts for the fact that the government bond risk premium are increasing due to higher government debt. Technically, this chapter develops a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to analyze the interplay between monetary policy, long-term interest rate and bond risk. The critical feature of the analysis involves the assessment of a monetary policy rule that is augmented with explicit response to risk premium shock. The results suggest that the augmented Taylor rule is more effective than the standard rule in mitigating lower output, particularly in situations where longterm interest rates play a pivotal role in spending decisions and aggregate demand fluctuations. The benefit of incorporating the response to risk premium becomes more evident when thecentral bank is concerned beyond the price stability. Moreover, the second chapter analyzes how central bank lending facility rate influences the liquidity creation of traditional and Islamic banks. The main findings indicate an adverse effect of the central lending facility rate, and this effect works mainly through cost of fund and safety net channels. In addition, the size of impact of lending facility rate differ between low and high state of liquidity creation, especially for regular banks. Finally, the third chapter combines two different approaches to examine the implication of monetary policy shocks on the profit from bank maturity transformation. The first approach involves panel data analysis, revealing that shocks to monetary policy have a detrimental effect on the profits from maturity transformation. The second approach employs a DSGE model with bank maturity transformation and suggests that the negative impact of monetary policy shock on the profit from maturity transformation varies with the cost of portfolio adjustment. A high adjustment cost amplifies the negative impact of monetary policy shock on the profit from maturity transformation.