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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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    Cited by:

    1. Hendar, 2016. "Inflation mechanisms, expectations and monetary policy in Indonesia," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 193-203, Bank for International Settlements.
    2. Solikin M Juhro, 2016. "Comments on "A spectral perspective on natural interest rates in Asia-Pacific: changes and possible drivers"," BIS Papers chapters, in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 151-156, Bank for International Settlements.
    3. Juhro, Solikin M. & Iyke, Bernard Njindan, 2020. "Consumer confidence and consumption expenditure in Indonesia," Economic Modelling, Elsevier, vol. 89(C), pages 367-377.
    4. Solikin M. Juhro & Bernard Njindan Iyke, 2019. "Forecasting Indonesian Inflation Within An Inflation-Targeting Framework: Do Large-Scale Models Pay Off?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 423-436.

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    More about this item

    Keywords

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

    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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