Frita Amrita

Abstract

Standard macroeconomic models assume frictionless monetary transmission, which fails in emerging markets due to deep institutional rigidities. This paper develops a framework to analyze how central banks overcome systemic market failures through institutional design, examining Bank Indonesia's transition to tradable, collateralized central bank securities (SRBI). By micro-founding monetary operations, the paper exposes two critical organizational frictions. First, the interbank market is modeled as a "Core-Periphery" topology where systemic "Whale" banks exert oligopsony pricing power. By hoarding liquidity, they create a "Liquidity Swamp" and an Interbank Decoupling Wedge that neutralizes policy signals. Breaking this oligopoly requires institutional redesign: issuing tradable securities to generate "scarcity rents" that bypass core banks' market power. Second, the paper identifies an organizational trade-off driven by regulatory arbitrage: the Credit Crowding-Out Wedge. While SRBI repairs interbank pricing, its 0% regulatory risk-weight creates unintended incentives. To optimize capital adequacy, banks hoard risk-free central bank paper rather than extending 100% risk-weighted private credit. The model defines a "Policy Effectiveness Threshold": issuing securities beyond systemic leverage capacity triggers a "Lazy Bank Trap," cannibalizing private investment. Calibrated simulations prove this institutional design resolves these frictions. Executing an "Interest Rate Twist," the central bank leverages SRBI to spike market rates to defend against capital outflows, while keeping the headline policy rate accommodative for domestic growth. This institutional decoupling reduces peak output contraction by ~0.50 percentage points, yielding substantial welfare gains. Ultimately, navigating the "Impossible Trinity" is an institutional problem, requiring fiscal-monetary coordination to preserve quasi-fiscal integrity.