Banks’ risk taking behavior and the optimization monetary policy

Abstract

This study analyzes the behavior of risk taking on economic agents such as banks, households, and firms as a repond of monetary policy and macroprudential choices in Indonesia. The behavior of economic agents modeled in a DSGE models. In the model, the credit risk is modeled endogenously. Credit risk is a function of household and firm leverage ratio, bank leverage ratio, property market and general economy condition. Moreover, there are two types of bank in assessing the risks of credit. The results show that, endogenous credit risk, has an impact on the deepen procyclicality in credit. Furthermore, this research model contributes to a deeper understanding of the prudential policy framework. In the event of risk taking, analysis optimal policy responses using the loss function of central banks. The policy of lower interest rates should be combined with a loan to value ratio policy and increase CAR to generate the smallest losses