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Inflation, Financial Market, and Economic Policy: A Review Essay and lessons for Indonesia’s Economy


  • Dhaniel Ilyas

    (Researcher, the Institute for Economic and Social Research, Faculty of Economics University of Indonesia (LPEM-FEUI))


This paper reviews several recent (influential) works on Inflation, Financial market, and Economic Policy. The works largely incorporated bounded rationality in their works and are in favor of adaptive learning behavior rather than using the rational expectation hypothesis. It is shown that the results can explain economic phenomena remarkably well. The positive feedback traders, speculation activities with common forecast rule can create bubbles that worsen economic crises into a deepening series. Also the mix of ‘classical’(orthodox) policy prescription by reducing the deficit and the need for seigniorage and ‘heterodox’ policy with exchange rate rule could work well in the short run and in the long run for reducing inflation. These insights fit quite well in the case of Indonesia’s economic crisis but some notes need to be addressed

Suggested Citation

  • Dhaniel Ilyas, 2008. "Inflation, Financial Market, and Economic Policy: A Review Essay and lessons for Indonesia’s Economy," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 56, pages 157-178, August.
  • Handle: RePEc:lpe:efijnl:200809

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    More about this item


    Inflation; Financial Market; Government Policy; Indonesia;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


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