Central Bank Policy Mix: Issues, Challenges, and Policy Responses: Handbook of Central Banking Studies by Perry Warjiyo

Part I
New Paradigm of Central Bank Policy Mix

Chapter 1
Central Bank Policy Mix: Key Concepts
and Indonesia’s Experience
Perry Warjiyo
Abstract Central banks’ mandates cannot merely be to achieve price stability; they
should be enlarged to include promoting financial system stability. To achieve this
dual mandate, central banks are advised to formulate and implement a policy mix of
interest rate policy, combined with exchange rate policy, capital flow management
as well as macro prudential policy. This policy mix should be further complemented
with strong coordination and communication.
Keywords Central bank policy · Policy mix · Bank Indonesia · Global financial
crisis (GFC)
Introduction
It is my pleasure to deliver the keynote address for this important workshop. After
serving my term as executive director of the Funds, in 2010 I initiated the development
of what is now termed the central bank policy mix in Indonesia. This period coincides
with the aftermath of global financial crisis 2007–2009, which marks a fundamental
change in the mandate and function of the central bank. The mandate of central
banks cannot merely be confined to achieving price stability, but and should be
enlarged with promoting financial system stability. To achieve this dual mandate, it
is advisable for the central bank to formulate and implement a policy mix of interest
rate policy, combined with exchange rate policy, capital flow management as well
as macroprudential policy. Policy mix should also be complemented with strong
coordination and communication. Our experience in Indonesia since 2010 has shown
that implementing a central bank policy mix is superior rather than only applying
a certain framework such as Inflation Targeting Framework (ITF), as we have done
in the past. In addition, the central bank also needs to be ready with the challenge
and opportunity from the rising of digitalization. When we are facing unbundling
of financial services through fintech and e-commerce, the central banks need to
understand and response properly. The fundamental idea is that monetary policy and

Central Bank Policy Mix: Issues, Challenges, and Policy Responses: Handbook of Central Banking Studies by Perry Warjiyo