Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia | Asian Development Bank

Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia

Publication | December 2010
Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia

Surges in Indonesia’s inflation and financial condition from late 2007 to 2008 were due to the country's loose monetary policy. Monetary policy discipline is needed to safeguard the country’s economic stability.

This paper provides an insight by specifically looking at developments in the conduct of monetary policy in Indonesia during the first decade of this century. It uses an estimated monetary policy rule to provide a benchmark for assessing the actual conduct of the country's monetary policy. The analysis suggests that a loose monetary policy stance also prevailed in Indonesia in the run-up to the global financial crisis. This situation helps to explain the surge in the country's inflation and its very high growth in financial condition from late 2007 to 2008. The paper reiterates the need for monetary policy discipline to safeguard the country's economic stability, and provides lessons to improve its macroeconomic management.

Contents 

  • Abstract
  • Background
  • Monetary Policy and Its Development in Indonesia
  • Methodology
  • Developments in Monetary Policy Stance and Some Stylized Facts about the Indonesian Economy
  • Effects of Changes in Administered Prices on Inflation and a Corrected Measure for Indonesia's Monetary Policy Stance
  • Assessment
  • Concluding Remarks
  • References