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This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks' starting capital positions and the size of capital injections.

This paper examines the effectiveness of monetary policy transmission in emerging economies during the COVID-19 outbreak. Using data from 14 emerging economies severely affected by the pandemic and the autoregressive distributed lag approach to cointegration, the study examines the effectiveness of monetary policy in affecting output, inflation, and credit. The study finds that: (1) In most economies, the monetary policy transmission to inflation is weakened due to the uncertainty created by the COVID-19 pandemic; (2) in a few economies, the transmission is found to be effective in stabilizing credit and output; and (3) the outbreak of the COVID-19 pandemic induced economic agents to follow a “cautionary” or “wait and see” approach.

This paper develops a macroprudential liquidity stress test model for Indonesian banks. Our model incorporates two factors driving liquidity runs: (i) idiosyncratic factors; and (ii) macroeconomic factors. We estimate this model using a sample of 113 banks over the period of January 2011 to June 2018, and dynamic panel data estimators. We establish significant transmission channels from macroeconomic and idiosyncratic (bank idiosyncratic risks) factors to liquidity runs. By using the macroeconomic scenario transmission, we find the liquidity stress test to be more consistent with the solvency stress test.

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