Bank portfolio model and monetary policy in Indonesia

This paper analyzes the banks' behavior in selecting their portfolio composition and their impact on the effectiveness of monetary policy transmission process in Indonesia. We employ an analytical model of the banking portfolio behavior based on microeconomic theory to understand how banks' portfolio behavior in maximizing their profit links to the efficacy of monetary policy. This study finds that micro banking factors affects the effectiveness of monetary policy. This study also finds structural changes in banks and borrowers have altered the effectiveness of monetary policy to encourage the economic growth and hindered the process of economic recovery. As perception on risk has large impact in supporting the effectiveness of the monetary policy, effort to reduce risk through the formation as credit bureau, credit guarantee scheme, and rating agencies is critical as it will improve transparency and availability of debtor information. The need for better coordination and harmonization between macro and micro policies would be beneficial. (C) 2007 Elsevier Inc. All rights reserved.