THE MONETARY POLICY REGIME IN INDONESIA

Solikin Juhro and Miranda S. Goeltom

No WP/17/2013, Working Papers from Bank Indonesia

Abstract: The challenges encountered after the financial crises of 1997 98 and 2008 09 have revealed some valuable lessons with regard to monetary policy. In a small open economy, such as that of Indonesia, the multiple challenges facing monetary policy as a result of capital flow dynamics, amid inflationary pressures, suggest that the monetary authorities should employ multiple instruments. This paper shows that coordinated implementation of a policy instrument mix should ultimately be part of an important strategy for optimally managing the monetary policy trilemma in the current climate, which is fraught with widespread uncertainty. It also shows that a post-GFC monetary policy framework in Indonesia is, generally, characterized by "enhanced" ITF. in "enhanced: ITF, the policy framework continues to adhere to an inflation target as the overriding objective of monetary policy. The main characteristics of ITF will remain, namely, that the inflation target is announced publicly and that the monetary policy is forward-looking, transparent, and clearly accountable. However, the ITF is implemented in a more feasible manner, which means that Bank Indonesia must not only look at the inflation target merely in terms of policy formulation but also consider a number of other factors, including financial sector stability and the dynamics of capital flows and the exchange rate. Therefore, achievement of macroeconomic stability not only is tied to monetary stability (price stability) but also interacts with financial system stability.

Keywords: Monetary policy; Inflation Targeting Framework (ITF); Flexible ITF; Bank Indonesia (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 E63 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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