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THE ROLE OF THE CENTRAL BANK IN PROMOTING SUSTAINABLE GROWTH: Perspectives on the Implementation of Flexible ITF in Indonesia

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  • Solikin M. Juhro

    () (Bank Indonesia)

Abstract

The global financial crisis of 2008-09 (GFC) and the deep accompanying recession created an overarching structural condition of a global and domestic demand shortage. Since then, from a broader policy perspective, there has been a growing call for a revival of the subdued role of the central bank in promoting sustainable economic growth. This paper shows that, in the midst of global uncertainty, the policy configuration to maintain sustainable economic growth should be aimed to simultaneously strike the internal and external balance. This implies that domestic policy cannot abandon export promotion strategies, while building up the domestic demand side of the economy. The role of the central bank, therefore, should be directed to integrate monetary and financial system stability frameworks. The paper also shows that the post-GFC monetary policy framework enhancement in Indonesia is characterized by the Flexible Inflation Targeting Framework (ITF). In this regard, the policy framework continues to adhere to an inflation target as the overriding objective of monetary policy. The main characteristics of ITF will remain; however, Bank Indonesia must also consider a number of other factors, including financial sector stability as well as the dynamics of capital flows and exchange rates. The feasibility of the framework should be in line with the empirical findings of this paper and provide a firm justification that, in a broader sense, a monetary policy framework aimed at achieving price stability is relevant for the Indonesian economy. By adopting ITF-based monetary policy, Bank Indonesia has sufficient policy space to absorb a certain degree of negative impacts of a crisis, thus preserving economic growth. To this point, strengthening policy coordination between Bank Indonesia and the Government in order to advance structural reform is sufficient to drive sustainable growth in the medium–long term.

Suggested Citation

  • Solikin M. Juhro, 2014. "THE ROLE OF THE CENTRAL BANK IN PROMOTING SUSTAINABLE GROWTH: Perspectives on the Implementation of Flexible ITF in Indonesia," Working Papers WP/17/2014, Bank Indonesia.
  • Handle: RePEc:idn:wpaper:wp172014
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    References listed on IDEAS

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    1. Palley, Thomas I., 2009. "Rethinking the economics of capital mobility and capital controls," Brazilian Journal of Political Economy, Brazilian Journal of Political Economy (Brazil), vol. 29(3), July-Sept.
    2. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
    5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    6. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
    7. Thomas I. Palley, 2011. "The Rise and Fall of Export-led Growth," Economics Working Paper Archive wp_675, Levy Economics Institute.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monetary policy; Instrument mix; Inflation Targeting Framework (ITF); Flexible ITF; Bank Indonesia.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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