Toward Improved Monetary Policy in Indonesia

Ross McLeod ()

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: Indonesia’s depreciation vastly exceeded that of all other countries hit by the Asian crisis. It also experienced far higher inflation. This paper argues that there is a close medium- to long-term relationship between money growth and inflation in Indonesia, and that this has not been greatly disturbed by the crisis. It argues that Indonesia’s disappointing performance in relation to maintaining the value of the rupiah can be explained by the central bank’s failure to sterilise the monetary impact on base money of its last resort lending to the banks. The fundamental lesson is that Bank Indonesia would be well advised to adopt slow and steady growth of base money as the nominal anchor for monetary policy, now that the pre-crisis policy of slow and steady depreciation of the rupiah has been abandoned.

Keywords: base money; inflation; depreciation; banking crisis; lender of last resort. (search for similar items in EconPapers)
Pages: 28 pages
Date: 2002
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pas:papers:2002-10

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