Legal Reforms in Indonesia’s Financial Sector on Institutional Relations between Bank Indonesia and the Government

The 1998 Asian Financial Crisis was a milestone in the existence of structural policy reforms in the Indonesian financial sector. Most of the empirical results show that the financial crisis was caused by the lack of soundness and instability of the financial sector. This problem changed the perspective of Bank Indonesia, the central bank in Indonesia, that financial stability is as important as price stability. This highlights the need for the central bank to also ensure financial stability, while monetary policy focuses on price stability and economic growth. However, achieving these goals does not always ensure financial stability. To address systemic risk, Indonesia has begun adopting macroprudential policies. Thus, monetary policy cannot secure both price and financial stability, and a policy mix with macroprudential measures is needed to achieve both price and financial stability. This research examines the relationship between monetary and macroprudential policies and their effects on stability. Monetary policy was measured by the BI Rate and macroprudential policy was measured by Loan to Value (LTV). Price stability was proxied by inflation, and financial stability by credit growth. We analyzed the causality between the variables using the Vector Autoregression Model (VAR) and Granger Causality Test, using quarterly time series data from 2005:Q1 to 2018:Q3. The findings indicate that monetary and macroprudential policies significantly affect price and financial stability. Empirical findings show that tightening the BI rate and LTV significantly reduces inflation and credit growth. This paper highlights the need for a policy mix to ensure price and financial stability.

Japan’s encounter with deflation and near‐zero‐interest short‐term interest rates in the 1990s led to a surge in research on the implications of the zero lower bound (ZLB) on nominal interest rates for monetary policy around the end of that decade. Based on model simulations, the literature at that time identified a number of key implications of the ZLB (see Orphanides and Wieland [2000], Reifschneider and Williams [2000, 2002], Eggertsson and Woodford [2003], and references therein). First, with low inflation targets of the kind followed by many central banks, the ZLB will frequently be a binding constraint on monetary policy. That is, Japan’s example is not an outlier but rather a harbinger for the future. Second, at inflation targets of 1% or lower, lowering the inflation target comes at a cost of higher variability of output and inflation, although the effects on inflation variability are relatively small. This analysis provides an argument for maintaining a positive inflation target cushion above 1%. Third, in rare instances of severe prolonged recessions accompanied by deflation, standard open market operations will be insufficient to bring the inflation rate back to target, andalternative sources of stimulus to the economy, such as fiscal policy, will be needed. Fourth, central banks can significantly reduce the effects of the ZLB onmacroeconomic stability by modifying their policy actions and communication to the public when the ZLB threatens to constrain policy. Specifically, policies that cut rates aggressively when deflation is a risk and promise to temporarily target a higher rate of inflation following episodes where the ZLB binds were found to greatly reduce the effects of the ZLB in model simulations. In the decade since this researchwas initiated, the ZLB has gone froma theoretical issue applying to Japan to one that plagues many industrialized economies. Indeed, an era of overwhelming confidence in monetary policy’s power to tame the business cycle while delivering low and stable inflation has been replaced by fears that the global economy could

Given the existing huge academic literature on the Asian crisis, its causes and effects, a strong case needs to be made for yet another paper or another special issue devoted to the crisis. The editors of the Asian Economic Policy Review have timed this issue of the journal to coincide with the 10th anniversary of Asian crisis. Ten years provide an automatic filter for some of the many hypotheses and claims that were made during and soon after the crisis. It also enables us to judge, in retrospect, how serious the crisis was, and whether the crisis appears to have had lasting effects. As the title of this special issue, “Ten Years After the Asian Crisis: What Have We Learned or Not Learned?” indicates, the focus is not on the causes or the immediate effects of the crisis, but rather on the lessons from the Asian crisis. The editors specifically asked authors of the papers in this special issue to indicate what they thought were the lessons that had been learned (or not learned) by the stakeholder, institution, or country they were examining. An examination of figures 1–3 in Takatoshi Ito's (2007) paper that graph data on growth rates, investment rates, and the nominal exchange rates in six Asian countries – Indonesia, South Korea, Malaysia, the Philippines, Singapore, and Thailand – provides some powerful evidence based on a simple before- and after-crisis comparison. With the exception of the Philippines, average growth has fallen in all the countries. Linked to this is the fall in the average share of gross domestic product devoted to fixed capital investment. The depreciations in all these countries were not short-run temporary phenomena, so that the International Monetary Fund's (IMF) push for exchange rate flexibility was appropriate, although exchange rate overshooting in December 1997 – January 1998 is obvious. Of course, there is argument about the reasons for the fall in investment ratios (and consequent falls in growth rates). Ito suggests that the Asian countries were over-investing before the crisis, whereas in the case of Indonesia, Hal Hill and Takashi Shiraishi (2007) suggest that the investment environment relative to the rest of East Asia and to the Soeharto era has worsened, and needs to be improved. This point is echoed by Siow Yue Chia (2007) who also argues that Indonesia needs to raise its investment levels. There was a substantial degree of agreement that the conditions imposed by the IMF in relation to its assistance to Asian countries were far too harsh, and that some of the conditions were politically unreasonable. Of course, the recipient countries agreed to the conditions, so it has to be asked why the countries agreed. There were suggestions that, in the case of South Korea, the agreements were made under duress, and, in the case of Indonesia, the president may have had no intention of keeping to the agreement. Two powerful examples of the problems caused by governments and central banks trying to hide potentially damaging information are provided during the Asian crisis by the Bank of Thailand's failure to disclose large forward commitments, and the Bank of Korea's shift of its holdings of foreign reserves to deposits with the overseas branches of South Korean commercial banks. If the information is likely to leak anyway and have a significant impact on the financial markets, then the authorities should not try to hide the information in the first place. Although the Asian crisis led to political change in each of Indonesia, South Korea, and Thailand, it is no exaggeration to say that the greatest change occurred in Indonesia. Although not directly suggested by Hill and Shiraishi (2007), it is possible to argue that at some point in time a change from the Soeharto administration was inevitable, so that some of the perceived impacts of the Asian crisis in Indonesia would have occurred quite apart from the Asian crisis. The astute reader will note that the term “twin crisis” appears in quite a few papers and comments in this issue, but the term is not always used with the same meaning. For example, in Hill and Shiraishi (2007) it refers to economic and financial problems and regime collapse, whereas in Stephen Grenville (2007) it refers to banking and balance of payments problems. This section summarizes the papers presented at the Third Asian Economic Policy Review Conference held in Tokyo on October 1, 2006, the comments by the assigned discussants, and the general discussion of each paper. The papers in this issue can be collected into two groups: those focusing on key stakeholders and institutions – the IMF (Ito, 2007), policy-makers (Grenville, 2007), and the banking system (Turner, 2007); and those papers focusing on the experiences of key countries – Thailand (Sussangkarn & Vichyanond, 2007), Indonesia (Hill & Shiraishi, 2007), and South Korea (Lee & Rhee, 2007). Ito's (2007) paper is an overview of the Asian currency crisis from an historical and cross-sectional perspective. He provides a detailed comparison of the IMF's treatment of three Asian crisis countries – Thailand, Indonesia, and South Korea – with the Mexican crisis that preceded the Asian crisis, and the post-Asian crisis cases of Russia, Brazil, Turkey, and Argentina. Ito's focus is on the different conditions under which the IMF provided assistance to these eight countries, and the size and composition of the assistance packages. The comparative analysis is used to determine what the IMF learned (or did not learn) from each crisis, and the extent to which these lessons were applied to later crises. Ito suggests the similarities between Mexico and Thailand are striking – 8% current account deficits, with about 10% capital inflows, just before their respective crisis. Ito argues that the IMF, having dealt with the Mexican crisis of 1994, could not prepare and implement any mechanisms to prevent or manage a crisis before the Thai crisis in the summer of 1997. The IMF's access limits required that the support package for Mexico be put together with the USA, and the package for Thailand be put together with Japan and Asian countries. Ito criticizes the total amount of support for Thailand as being small when compared with Mexico, and with the size of forward commitments of the central bank. Ito identifies several problems with the IMF program for Indonesia, which was signed at a time of relatively strong macroeconomic conditions. First, banks closures with only limited deposit guarantees led to a run on banks and accelerated capital flight. Second, President Soeharto deviated from the IMF program. Third, there were large swings in macroeconomic policy. The signing ceremony for Indonesia's revised letter of intent provided strong symbolic evidence that the IMF was ruling Asian countries. The South Korean crisis, which caught many by surprise, is regarded by Ito as being the closest to a pure liquidity crisis as lenders refused to roll over loans to South Korean firms. To finally deal with the Korean problems, the IMF and Group of Seven had to resort to an unusual measure, jawboning commercial banks to roll over their lending. This was a switch from the lender-of-last-resort approach to the private-sector-involvement approach. In contrast to the IMF's actions taken in relation to the Asian countries and despite the view held by many economists outside the IMF that a fixed exchange rate regime is unsustainable, a fixed exchange rate (or crawling peg) was allowed to continue in the first IMF program in each of the crises of Russia, Brazil, Turkey, and Argentina. This strikes Ito as the IMF being “soft” in the post-Asian crises. Although not denying IMF assistance was beneficial, Mohamed Ariff (2007) also focuses on the conditions attached to the assistance. In particular, he is critical of the manner in which the conditions were attached. In examining and evaluating the IMF and the lessons it has learned or not learned, Ariff argues that more attention should have been paid to Malaysia, a country that chose not to seek the IMF's help. The key reasons for this choice being that Malaysia had small short-term external debt and adequate reserves. With the exception of the exchange rate system, he claims that the policies Malaysia implemented were quite similar to those undertaken in the other crisis countries. Akira Kohsaka (2007) questions the operational usefulness of a policy allocation that matches lender of last resort assistance to liquidity crises, and private sector initiative assistance to solvency crises because it will face the obvious difficulty of determining whether a country is solvent or insolvent in crisis times. Kohsaka also questions whether the IMF actually learned anything from history given that the successful Mexican case was not applied to Thailand, and that in the Russian and Argentine crises the lessons from the unsuccessful Asian cases were not applied. Jong-Wha Lee argued that Ito's approach of focusing on the role of the IMF and crisis management in each country leads to ignoring other important aspects of the crisis, for example, the question of what the key structural problems in Asian countries were. Hadi Soesastro claimed that the reason why Indonesia had to resort to the IMF was concern at the time about contagion, and the effects on the rupiah of statements made by Malaysian Prime Minister Mahathir. Hill raised the questions of whether the Asian crisis could have been prevented, and what vulnerability indicators were showing before the crisis. He guessed that the private sector behavior in Thailand with a lot of private capital exiting was quite different to Indonesia, Malaysia, and South Korea where there was no indication that the private sector would exit. Although agreeing with Ito that the Asian crisis was a crisis involving a shortage of liquidity and the idea of the Asian Monetary Fund was driven by this shortage, Shinichi Yoshikuni asked what kind of crisis would be likely now in Asia where there is in fact an excess of liquidity given the current extremely large foreign reserve holdings. Chalongphob Sussangkarn suggested that to make the paper complete, a discussion on IMF reforms was required. Atchana Waiquamdee argued that the subject of research conducted by the IMF had evolved over time, it needed to now focus on how to prevent the kind of crisis in other emerging markets in terms of capital liberalization. Ito agreed that Malaysia would be an interesting case study, especially in a comparison with Indonesia. Although acknowledging that there were structural problems and macroeconomic problems in each country, Ito emphasized that he believed that, when compared with other countries, the Asian crisis was more of a liquidity crisis than the result of structural problems. His bottom-line was that Asia was shortchanged by the IMF when compared with Mexico and the post-Asian crisis countries. The purpose of Grenville's (2007) paper is to examine how economic policy-making in the countries affected, in the Asian region and at the global level, changed as a result of the Asian crisis. Despite the size of the Asian crisis, Grenville argues that, although there were significant changes to the politics in the three countries most affected by the crisis, little change has occurred in the broad approach to economic policy. One important set of Grenville's conclusions relates to the responses that did not occur in the wake of the crisis: trade restrictions were not imposed; capital restrictions were minor and removed quickly; debts were in general honored; the Washington Consensus was broadly maintained; and banking systems were supported and restructured, rather than being allowed to fail. Although the broad tenets of the Washington Consensus, with its market-based policies, remain in place, there is now a recognition that well-functioning markets require complex institutions, rules, and procedures, and that these take time and effort to develop. At the international level, the IMF remains as the principal international crisis manager; and there is still no coordination of international economic policy-making. Changes in awareness and mindsets are where larger changes have occurred. Grenville suggests the major policy change is a much greater awareness of the vulnerabilities posed by large international capital flows. Changes in the mind-set have given sharper focus to regional exchange rate arrangements – both in the implementation of a greatly strengthened foreign-exchange swap arrangement, the Chiang Mai Initiative, which pools reserves, and the vigorous discussion about an Asian common currency. At the global level, Grenville finds that there has been considerable progress in developing the institutions that will govern and assist international capital flows. For example, the IMF has implemented various useful transparency-enhancing measures, and has undergone a major change to its thinking about international capital flows. The Asian crisis was not the first where foreign capital volatility was a major factor (Mexico in 1994 illustrated this issue), but it was the (belated) catalyst for a recognition that the volume of inflows might overwhelm small and immature financial sectors, and result in asset-price booms, upward pressure on exchange rates, and, in turn, a change in sentiment accompanied by massive and hugely damaging capital reversals. This recognition has not yet been matched by a convincing policy response. Although the IMF handled more recent crises better (larger and quicker disbursements of assistance, less and better-focused conditionality, different macro-advice), there is nothing to directly address capital-flow volatility, which is apparent even in mature transparent markets, nor to put in place better systems for resolving large-scale international default. Using recent examples of capital controls introduced in South Korea, Thailand, and China, Robert McCauley (2007) takes issue with the suggestion that East Asia has followed the consensus favoring capital account openness. In worrying about the appropriate level of foreign reserves to short-term debt, McCauley also draws attention to the need to take account offshore debts of firms and financial institutions. McCauley interprets the Asian crisis as an expression of Asian financial disintegration caused by the collapse of the Japanese asset bubble, so that measures to spur regional financial integration should receive more attention. As part of any surveillance process among Asian countries, Eiji Ogawa (2007) highlights the importance of policy discussions about exchange rates issues, macroeconomic policy, and the soundness of the financial sector. He notes that there is a large gap between surveillance and regional policy coordination because there is no commitment among the Asian monetary authorities to policy coordination. Given that regional financial cooperation can complement and supplement assistance provided by the IMF, Ogawa stresses the importance of considering the relationship between regional cooperation and IMF assistance. Although “original sin” refers to countries borrowing in foreign currencies and being vulnerable when depreciations occur, Yoshikuni raised a different type of “original sin,” namely, the vulnerability of Asian countries to exchange rate appreciations given their large asset holdings (especially, foreign reserves) in foreign currencies. While agreeing about the importance of developing bond financing, he pointed to the need for appropriate regulation and monitoring as was the case with bank financing. Both Ariff and Anwar Nasution agreed that a common currency will be a long time coming to Asia. Ariff wondered whether a common exchange rate based on a basket currencies with common weights was less far-fetched, and Nasution asked how, given the de facto dollar peg in the region, competitive devaluations could be avoided. Chia took up the issue of surveillance mechanisms in Asia and suggested that the ASEAN (Association of South-East Asian Nations) initiative and the ASEAN Plus Three initiative provided for some surveillance. She suggested that the “Asian way” where governments are reluctant to criticize their neighbours does not augur well for surveillance mechanisms. Lee thought that the paper had missed out on the reaction of private international investors that were particularly relevant for South Korea. In any discussion of the relationship between the crisis and reform, Lee argued that the issues of political change, and how governments get support for reform from the people need to be discussed. Although it was initially believed that a bond crisis was more difficult to resolve than a banking crisis because of the difficulty of bond holder meetings, Ito suggested that recent examples indicated that a bond crisis resolution may be much easier in the future. Kohsaka argued that reservations need to be added to the claims that the Washington Consensus was maintained and the IMF is still the principal international crisis manager. For the former, adequate preparation of a safety net has been highlighted, while for the later, the role of the IMF will have to be revised. Ito alluded to the problem that the Washington Consensus means different things to different people by pointing to John Williamson writing a book correcting what he believed were misperceptions about the meaning of the Consensus. Grenville agreed that we cannot be against capital controls in principle, but we need to argue about which controls will, on balance, be useful. He saw controls on foreigners borrowing in domestic currencies as being a control with little cost and large benefits. Grenville acknowledged that there were some regional arrangements, pooled reserves, or swap arrangements, in place before the crisis, but noted that none of them were invoked during the crisis. The fact that we still believe in markets and have not gone back to more divisive, intervention-prone methods of policy-making are, Grenville believed, quite consistent with the Washington Consensus. Philip Turner's (2007) starting point is that the weakness of local banking systems was a major cause of the Asian financial crisis because banks could not manage their risks well; official supervision was weak; banks were undercapitalized; and market discipline was undermined by misleading financial data provided by banks. Nearly all the statistical measures (profits, risk-adjusted capital and provides indicate that banks have much but the evidence also that much of the recent in bank is because of the of rates and strong for would have been much Given that measures can be argues that it is important to make a of how banking systems have effort to the of banking supervision has been by the banking crises in the emerging market countries during the the most significant as having been in the of by many The by official in the region are evidence that central banks and are more likely to to address vulnerabilities than they were before the crisis. In better information about banks market discipline more there is now much greater awareness of the importance of suggests that there are a of significant despite all these He the problems of policy-makers in much of Asia having in with a that banks that are not subject to and banking systems in some countries are still too In the risks that Asian banks now face are different to the risks they before the crisis. There are three of risks that as attention. First, there are risks that are to the of to the sector. Although with the to and banks from on risks from to are more Second, there are rate risks from the bank holdings of Third, there is exchange rate given that it is how well banks are to with that could from a large currency Nasution (2007) provides some important to the of Turner's He argues that the analysis of bank needs to examine more the of bank and also the of bank Although risk-adjusted capital ratios of banks are the of that were used to the of banks in Indonesia has limited to Although acknowledging that in in Asia have Nasution suggests that problems with still for in both and Indonesia. He also to the strong of foreign banks with their international and that might to them out the domestic Given that macroeconomic conditions were by as having to banks and banking systems (2007) with macroeconomic risks and the need for to take these effects into account when about the of the banking two macroeconomic where investment in the Asian as a result of rates, and the other where domestic leads to an of the exchange suggests that need to be provided to banks to them to capital ratios in so that they have some to when difficult a of bank in several countries, Ariff raised the problem of whether central banks have the that is better – that the Ariff suggested that banks far better than large banks during the crisis. and Kohsaka asked whether the reason for a shift in bank from firms to was a temporary of by firms to or some other reasons the of other in information are by as to banks more but whether in the relevant countries there were investors with to the Ito raised the case of the Philippines, which was not a recipient of in the banking or currency He wondered whether there was support for the argument that because the had a history of banking crises that it was better than other countries. Hill suggested that the key for the were no and no In relation to the on foreign bank Ito introduced the idea that up to foreign markets will foreign so that the foreign banks may provide support during a crisis with This idea to be supported by evidence for South Korea but was not supported by the Argentine raised the problem of how to and of banks given the of data on the relevant because of and If the was that the Asian were too on banks and not on bond and markets, was that not much had argued that it may be a little too to whether the of banks had and their will be given the amount of into banks. He suggested that although the Asian crisis us the importance of a financial markets, South Korea has an even more also pointed to the many banks and banks in South Korea that an important role in private but now they have to with private and asked whether other countries have a similar Grenville raised about the of measures we are in the of the and we have little information about In Indonesia, Grenville claimed that banks have more or less the same market share they have always they have not any of their problems, and with of 10% there are problems of He also argued that relationship was not as as it to people and If are the only then to Sussangkarn suggested that a discussion of the political of the issues, the between and is a key In Thailand, there is still a lot of between the Bank of Thailand and the of about where the is to As a there is no Bank of Thailand asked whether countries other than Thailand had information among the commercial bank which could as a useful to problems. agreed that of loans may well be an important of recent bank but it is difficult to how large it He acknowledged that the discussion of banks was of the of paper in that he had not the extent to which they have changed and the extent to which banks are the Although the financial system in Asia still remains bank the of bank in South Korea is not by other countries. argued that to measures should not be by because it could the that the they are when they are He suggested the shift in bank from firms to was the result of a structural change as well as a from firms for the crisis in Thailand, a program of financial was but the risks in this process were not was out an adequate for financial institutions, and appropriate monetary and exchange rate Sussangkarn and (2007) that were the to capital while to a fixed exchange rate system and trying to an monetary policy. the risks to economic in the 1997 crisis. As a result of the crisis, Thailand had to the fixed exchange rate system and to the IMF for financial assistance with its Although Thailand could from the IMF program by the of it took much to up problems in the particularly debt and up the loans of various financial institutions. of the key reforms from the 1997 crisis that Sussangkarn and argue should the of a similar crisis data for and economic the crisis, the of data for and economic management was The has greatly the crisis, and should to more monitoring and of problems. monetary policy An monetary policy was in to provide a monetary Although the process was not always the system is now well by the but a for the system is The also needs to be sector reforms the of a deposit system and the of capital markets have been in this although much of the required remain to be Sussangkarn and two of risks to economic as political in financial institutions, and the of One major concern is that now to that the will always their debt they cannot it Although the claimed that the of the sector was the many policies were out to hide the of the If the lessons have been learned from the crisis, this should not have Waiquamdee (2007) focuses on the lessons learned by the Bank of Thailand in the wake of the Asian crisis. The first is the of

The government has an important role in the welfare of the people's economy. One of them is through the role of the central bank by carrying out monetary policy. This policy was adopted by the central bank or Bank Indonesia (BI) through several instruments, including through regulating discount rates for commercial banks. In this case, BI sets the inflation target as a reference for determining interest rates. When the inflation rate exceeds the targeted, BI will raise interest rates which in turn will reduce the credit issued by commercial banks to the public, because commercial banks must pay higher interest rates to the central bank. And the results of the analysis that the interest rate charged in the credit (Lending Facility) discount facility is classified as an act of usury. Meanwhile, the profits obtained from the deposit of funds in the Facility Deposit transaction are not permitted in the Islamic economy, because in the Islamic economy there is no interest rate but profit sharing, given the fixed and concrete interest rates. In addition, the discount facility is also incompatible with some Islamic economic principles, including; the principle of Illahiyah, Justice, and the government.

Summary The economy continues along the general trajectory described in recent Surveys. Growth is picking up, led by consumption but restrained by investment. Inflation has fallen well below Bank Indonesia's current target rate. Most interest rates have followed suit, including key lending rates. Bank lending has been expanding at around 20% p.a. for the past year or so, and international portfolio investors are again interested in Indonesia. But a scare in the mutual funds industry and scandals at two state banks remind that trouble still simmers just below the surface in the financial sector. Fiscal policy continues its conservative stance. The government is likely to have achieved its 2003 deficit target, and the budget for 2004 envisages further narrowing of the deficit. Still, the deadline for achieving a modest budgetary surplus has slipped two years, to 2006. Draft amendments to the income tax law foreshadow a probable reduction in corporate tax rates, increases in personal rates, and removal of certain key exemptions. Proposed administrative changes would give tax officials significantly greater powers of investigation and prosecution; observers foresee increased scope for extortion by unscrupulous officials. Monetary policy has become increasingly expansionary, given the central bank's desire to support economic recovery and its success in driving inflation down. This is reflected in quite rapid base money growth and sharp falls in policy interest rates, notwithstanding some efforts by Bank Indonesia to slow their decline. Trade policy has been dominated by increasing signs of resurgent protectionism, including a shift away from a transparent tariff regime to rent-generating systems of licensing. On the political front, opinion polls in advance of the national elections suggest a considerable shift in the parliament, away from PDI-P in favour of Golkar. The size of this shift will be critical in determining the choice of candidates for the subsequent presidential elections. At present, Megawati Sukarnoputri remains the front-runner, but almost any combination of major parties could still form a coalition and make a credible run at the presidency. With elections looming, little further progress can be expected on the economic policy front in 2004. In these circumstances, the focus for progress shifts to a politically independent Bank Indonesia. With strong policies in its areas of responsi-bility—inflation, monetary policy and financial sector development—further progress is achievable even during an election year. This would lay a solid foundation for robust economic recovery, hopefully policy driven by the next administration.

This study investigates the cause-effect relationship between financial sector development and economic growth; in Nigeria through supply-led growth and demand-led growth models. Annualized time-series data extracted from the Central Bank of Nigeria Bulletin from 1999 to 2017 were used in the investigation. The supply-led growth model assumes that financial sector development granger causes economic growth. The demand-led growth model assumes that economic growth Granger causes financial sector growth. Estimating the cause-effect relationship the Autoregressive Distributed Lag (ARDL), and Pairwise Granger Causality was adopted. Findings revealed that the causal relationship is influenced by the stages and level of economic and financial sector growth through the appropriate policy mixes, of the regulators and monetary authorities. The Error Correction Model (ECM) adjusts for disequilibrium caused by the financial and economic factors of lack of economic value, chain effect of export goods, saving-investment gap, and decrease in capital productivity, back to equilibrium at 37% annually. Both the supply-led growth and demand-led growth models hold in Nigeria. The findings differ from previous studies in Nigeria and report that the causality between finance and economic growth is based on stages and the level of economic and financial sector growth and development. The study also supports the argument of Patrick (1966).

To analyse the relevance of CBCA in those countries where another country’s currency is legal tender we have to discuss which factors affect central bank capital, and we have to investigate whether there is an optimal level of capital for central banks. In answering those questions, one needs to highlight the main differences between central banks in charge of monetary and exchange rate policy, and central banks without these responsibilities. In the literature, capital needs have been mainly coupled with the existence of the domestic currency and the conduct of monetary policy and exchange rate control. However, the reasons for holding capital are wider. Some are common to private companies, while others pertain to central banks alone. First, there are reasons for holding capital that apply to any central bank. As in the private sector, capital has to cover potential losses. But for a central bank, some potential losses can be incurred as a consequence of the central bank’s institutional mandate. The typical mandate for a central bank comprises conducting the monetary and foreign exchange policy, maintaining a secure payment system and a stable banking sector. So, losses can be incurred in many ways. They could be a consequence of the day-to-day management of the currency reserves,3 or brought about by sterilization operations, or follow from emergency liquidity assistance when the central bank has to grant concessional credit to rescue ailing institutions. These contingent liabilities tend both to reduce the transparency of central bank accounts and to make the assessment of a central bank’s financial position more difficult (Blejer and Schumacher 1998). Despite these potential losses deriving from a central bank’s institutional mandate, central banks may be profitable institutions, in view of their monopoly power. Central banks can enjoy seigniorage arising both from the issue of the currency and from banks’ funds held at low or zero interest with the central bank. In the long run a central bank’s profitability should be secure as long as the demand for banknotes is maintained, the central bank keeps monopoly power over money issuing and the rate of inflation is not too low. There is a link between price stability and financial autonomy. Low inflation ensures adequate demand for money, and demand for money ensures seigniorage (at a given nominal interest rate, at least) and hence financial independence. That, in turn, is key for autonomy and reputation – necessary conditions to achieve price stability. However, lower inflation eventually goes hand in hand with lower nominal interest rates, and seigniorage may be defined as the product of the nominal interest rate and the monetary base. So, lower inflation is likely to reduce seigniorage at least at some point, as was noted in the introduction to this chapter. Second, like a private bank, a new central bank needs capital to fund its start-up costs. Third, capital has also to generate continuing operating income to secure the long-term financing of operating costs. Adequate capitalization matters to ensure income to cover future costs. Finally, the amount of capital signals to stakeholders how well the institution is being managed (though this signal scrambled because central banks may incur losses for legitimate policy reasons). In any case, if the public infers from negative capital that the centralbank is poorly run, it may erode the bank’s general reputation4 (Vaez-Zadeh 1991). Moreover, approaching the government frequently would compromise the actual and perceived autonomy of the central bank. In sum, central bank autonomy can easily be eroded, unless supported by adequate financial strength. The above-mentioned factors govern central banks’ demand for capital. But they differ when the country has no domestic currency of its own. Table 6.1 highlights the main determinants of central bank capital in the two cases. In the second case, identifying potential liabilities and risks facing a central bank is much simpler. But even then one must define the central bank’s relevant overall assets or resources and its potential liabilities in the future.5 Here, the central bank’s demand for capital will vary with: (i) the level and type of risks faced, (ii) past, present and future profitability and (iii) financial arrangements regulating the relationship between the central bank and the government (profit-sharing rules, obligations of the national treasury in case of need, fiscal treatment). The central bank’s risks depend on the number of its functions, the level of development of the financial sector and the prospects for adverse events affecting its financial stability, the exchange rate regime and the level of inflation. Consequently, as far as risk assessment is concerned, we should expect that potential risks should be lower for central banks without a domestic currency given that there is no contingency for monetary and exchange rate policies and banking sector crises. Some situations where a central bank might need to deploy its resources do not apply. Such situations include requests for support to defend the exchange rate, or interventions through sterilization operations to keep the monetary aggregates under control or to inject new liquidity to rescue ailing banks. On the other hand, in order to perform its refinancing function in case of a banking crisis, we would expect a central bank without a domestic currency to hold more capital, provided that it cannot create additional liquidity by issuing a new monetary base. Since the central bank could not create additional liquidity, commercial banks would require more capital, as they lacked access to a lenderof last resort facility. However, even without its own monetary and exchange rate policies, a central bank might risk financial losses on initiatives and policy actions warranted on public interest grounds. Such initiatives include rescuing ailing institutions, safeguarding the payment system, and setting up a credit register. They might be reluctant to act without adequate financial resources to absorb such additional expenses. There are also differences in profitability and financial arrangements. In the absence of a domestic currency, the central bank has no seigniorage to exploit. Without seigniorage the central bank has to rely on government funding, returns from its own capital and any commissions or fees from regulated sectors. There is a much greater role for capital to serve as a means for generating operating income, and a greater need for adequate financial arrangements to protect it. How much equity does a central bank need? For central banks without a domestic currency, and no seigniorage income, a simple rule might calculate the amount of capital by considering the goal of covering operating costs – assuming a particular (real) rate of return. But potential losses arising from carrying out its mandate also needs to be allowed for. The more numerous the central bank’s areas of responsibility, the larger its capital needs. For instance, central banks that manage foreign exchange reserves should have higher levels of capital, as should those that run their own monetary policy. The size of the country may matter. In very small countries it is common to find simple institutional arrangements with only one monetary and financial authority, presumably widening the central bank’s responsibilities. If there are fixed costs and scale economies in operating a fully fledged central bank or financial regulator, a small country’s central bank would need proportionately more capital. For small countries this argues in favour of simpler institutional arrangements for their monetary and exchange rate regimes. It might justify sharing the burden of sustaining the central bank’s finances with others bodies (government; financial intermediaries), with implications for transparency and accountability. What institutional arrangements should define the relation between the government and the central bank? The level of central bank capital is only one aspect of the relationship between them. The nature and extent of a central bank’s financial autonomy is shaped by its relation with the government, and how that is reflected in the structure of arrangements for financing central bank activities, for sharing risks and distributing its profits and losses. There might be direct transfers from the treasury to the central bank, reducing the need for central bank capital. But pre-agreed mechanisms and rules would have to protect central bank financial autonomy. Risk treatment and risk bearing could also be affected. Risky balance sheet items or contingent liabilities could be held by the government, with the government taking over some quasi-fiscal activities from the central bank. The government could take responsibility for providing financial support to banks in difficulties. And if the central bank generates revenues, rules governing its profit distributions would be required. In practice, Ueda (2004) shows that there is a high variance in the levels of capital held by central banks around the world. He presents the ratio of capital tototal assets for a number of central banks.6 This ratio varies widely from country to country. The variance reflects differing motivations ascribed to central bank activities, different kinds and received levels of risks, and different profit and sharing rules with national governments.7 It could also suggest a lack of consensus among central banks about the desirable level of capital.

Abstract. The global crisis of 2020, caused by the spread of the COVID-19 coronavirus disease, has led to decline of the Ukrainian economy and contraction in the welfare of society. To overcome the effects of the crisis, the monetary and fiscal authorities have provided strong incentives, primarily to support the most vulnerable social groups and businesses most affected by quarantine restrictions, as well as to facilitate the financial stability of the banking sector. In conditions of limited government resources, to minimizing the negative effects of the crisis requires the highest efficiency of monetary and fiscal policies, which can only be achieved through proper coordination between monetary and fiscal authorities. The present article examines the peculiarities of the conduct and direction of monetary and fiscal policies before crisis processes arose in Ukraine and identifies the factors that constrain the effectiveness of both policies: shadow economy; permanent budget deficit; excessive public debt service costs; the dominance of non-monetary inflation factors in taking monetary policy decisions. Anti-crisis measures of monetary and fiscal authorities are described and analysed. It was determined that the stock exchange channel of money issuance stood inactive during the crisis, which led to a significant imbalance in the interest rate environment in Ukraine and to the increase in the cost of government borrowing in the domestic market, what was caused by poor coordination between monetary and fiscal policies. It has been established that the dominance of the state in the banking system of Ukraine has a negative impact on bank lending during the crisis, and the government’s program to stimulate lending restrains the reduction of interest rates on new loans through market mechanisms. To ensure post-crisis sustainable economic development, the following measures are advised: ensure a gradual reduction in public debt service costs; make the transition to a countercyclical fiscal policy, which will allow for an expansionary monetary policy; implement measures aimed at reducing the concentration of the state in the banking sector and endorse lending to the real sector of the economy rather than government, through state-owned banks; stimulating lending through monetary rather than fiscal mechanisms. Keywords: monetary policy, fiscal policy, monetary-fiscal policy coordination, economic development, central bank, corona crisis, Ukraine. JEL Classіfіcatіon E52, E62, E63, H12 Formulas: 0; fig.: 4; tabl.: 1; bibl.: 37.

This research comprehensively examines the dynamics of legislation and legal reform in Indonesia in 2025, with a primary focus on the implementation of Law No. 4 of 2023 concerning Financial Sector Development and Strengthening (PPSK Law). The background of this study is the urgency of strengthening financial sector regulations to maintain system stability, protect consumers, and support sustainable economic growth amidst global and domestic challenges. The main objectives are to analyze the substance of the PPSK Law, evaluate its implementation process up to 2025, identify challenges encountered, and measure its impact on the Indonesian financial sector. Employing a normative legal research method enriched with an empirical approach through document analysis and literature review, this study finds that the PPSK Law has brought significant changes in the governance and supervision of the financial sector. Nevertheless, its implementation faces various challenges, including the harmonization of derivative regulations, infrastructure readiness, and business actors' adaptation. Notable impacts include improved stability, consumer protection, and market efficiency, though continuous evaluation is needed to ensure optimal achievement of reform objectives. The research concludes by emphasizing the importance of synergy among institutions and regulatory adaptation to technological innovation.

Monetary policy is a prominent stabilization mechanism often used to accomplish price and economic stability in a country. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the instruments used. The aim of this paper was to review the evolution of the monetary policy framework in Sri Lanka and its impact on the financial sector. The review is important, and monetary policy is intended to impact aggregate spending in the economy to contribute to the goals of full employment, price stability, sustainable economic growth, and balance of payments equilibrium. The paper reviewed more than twenty-five research and review papers using a thematic approach. The paper explains the historical evolution of monetary policy regimes in Sri Lanka and the reasons for adopting various monetary and exchange rate policy regimes from time to time. The review considers national and international studies on monetary policy regimes and their impact on the financial system. The paper concludes that the Currency Board could not influence the money supply in any way, and until the adoption of open economy policies in 1977 under the fixed exchange rate regimes, the Central Bank had no control over domestic inflation. The review also identifies that flexible inflation targeting is the international best practice of Central Banking, and flexible inflation targeting enables the maintenance of low inflation, thereby helping economies achieve a high and stable growth path. However, it emphasizes that it should be maintained sustainably subject to several conditions through government intervention.

Using Capital Flow Model and Central Bank Reaction Function for the case of Indonesia before the current crisis, this paper found that during Indonesia implemented fixed exchange rate regime the monetary policy which was done by Bank of Indonesia has lost its independence. The regression results using Two Stage Least Square method show that the monetary policy during the period before the current crisis in Indonesia was very influenced by the behavior of private capital flows. To neutralize the liquidity effects of private capital inflows as a response to deregulation packages in financial and banking sector in the late of 1980s, Bank of Indonesia has actively implemented the sterilization policies. The regression results of the Central Bank Reaction Function indicate that Bank of Indonesia could not completely sterilize the liquidity effects of private capital inflows. This situation made the monetary policy undertaken by Bank of Indonesia lost its power to stabilize inflation in the economy. The phenomenon of high inflation which followed high economic growth (overheating economy) during the period before the current crisis has significantly reduced the index of competitiveness of Indonesian goods and services in the world market. This is one of the main factors that caused slower Indonesian export growth just before the crisis began in the mid of 1997. This situation made the level of supply of foreign exchange in domestic market dropped significantly, while on the other side the demand level increased as many big corporate businesses and government institutions needed foreign exchange to repay their foreign debt. Rupiah become unstable and public expectation for further devaluation widened. This was the beginning of the current crisis that until now put Indonesia into the deep trouble. Therefore, the most important contribution of this paper is its investigation to the linkage between deregulation and the current crisis. This paper recommends that one of the main factors that generate the Indonesian current crisis has showed up far before the crisis began. It was started when the monetary policy lost its power to stabilize inflation that was caused by behavior of private capital inflows as a response to the wrong sequence of deregulation policies in Indonesia.

This study aims to legally analyze the plan to expand Bank Indonesia's mandate, which not only functions to maintain monetary stability, payment systems, and financial system stability as stipulated in Law Number 23 of 1999 concerning Bank Indonesia, but is also directed at supporting national economic growth. The main issue studied is the extent to which the expanded mandate is in line with the principle of central bank independence as guaranteed in Article 23D of the 1945 Constitution of the Republic of Indonesia. The analysis was conducted by examining the latest provisions in Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector (P2SK Law), government policies within the framework of economic development, and implementing regulations related to strengthening Bank Indonesia's functions. The results of the study indicate that normatively, the expansion of Bank Indonesia's mandate has legal legitimacy based on the P2SK Law, but has the potential to reduce institutional independence due to the possibility of fiscal and political policy intervention in determining the direction of economic growth. Nevertheless, the protection of Bank Indonesia's independence remains guaranteed through checks and balances mechanisms, such as the regulation of the Board of Governors' term of office, the prohibition of external intervention in decision-making, and the obligation of accountability to the House of Representatives. Thus, expanding Bank Indonesia's mandate is legally possible, provided it is carried out within the framework of the constitution and laws and regulations that guarantee a balance between independence and accountability.

Renewal of Islamic law in Indonesia occurred due to social changes in society along with the development of technology and science. This social change in turn demands new laws that are based on human needs without destroying their religious aspects. Therefore, the corridor used in every exploration of Islamic law is to understand the literal meaning of the Al-Quran and Sunnah. A reformer, including those in Indonesia, must be able to understand maqasyid al-syari'at , namely the purpose of the Shari'a revealed only for the benefit of humans. This research attempts to capture the dynamics of Islamic legal reform in Indonesia by looking at the extent to which maqashid sharia functions as a driving aspect of this change. This research is qualitative in nature through empirical and normative approaches, namely by looking at maqashid sharia theories which are applied empirically in the renewal of Islamic law in Indonesia. From the research results, it was found that maqashid sharia reasoning has long been developed and practiced by ulama in efforts to reform Islamic law, both before Indonesian independence and after Indonesian independence. This gives a sign that Indonesian scholars and society in general are familiar with maqashid sharia. Another finding is that the decisions taken through maqashid sharia reasoning in the context of legal reform in Indonesia have consistently been able to adapt to social changes in Indonesia in almost all sectors, legal, social and economic without violating general sharia provisions. So that legal reform efforts in Indonesia have been able to achieve the objectives of the Shari'a in protecting religion, soul, mind, property and descendants. It was marked by the birth of several rules based on maqashid sharia reasoning which were in accordance with the needs of social and societal change

INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY

The Encyclopedia of Central Banking provides definitive and comprehensive encylopedic coverage on central banking and monetary theory and policy. Containing close to 200 entries from specially commissioned experts in their fields, elements of past and current monetary policies are described and a critical assessment of central bank practices is presented. Since the financial crisis of 2007, all major central banks have intervened to avert the collapse of the global economy, bringing monetary policy to the forefront. Rochon and Rossi give an up to date, critical understanding of central banking, at both theoretical and policy-oriented levels. This Encyclopedia explains the complexity of monetary-policy interventions, their conceptual and institutional frameworks, and their own limits and drawbacks. The reader is provided with the body of knowledge necessary to understand central banks' decisions in the aftermath of the global financial crisis and controversial explanations of the crisis are illuminated from a historical perspective. Academics and students of economics will find this an indispensible reference tool, offering current and necessary insight into central banking and monetary policy. Practitioners in the financial sector will also benefit from this refreshed insight into this fundamental topic.