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Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia

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Abstract

Lax monetary policy in the United States has been pointed out as one of the responsible factors behind the recent global crisis. Similar loose monetary conditions also prevailed in many European countries before the crisis and were argued to be among the accommodating factors behind the run-up in asset prices that helped trigger the 2007 financial market turmoil. Did a similar situation also prevail in Asia? 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.

Suggested Citation

  • Ramayandi , Arief & Rosario, Aleli, 2010. "Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia," ADB Economics Working Paper Series 238, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0238
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    Keywords

    monetary policy discipline; Indonesia; macroeconomic management; inflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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