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Optimum Monetary Instrument Option in the Case of a Small Open Economy


  • Arief Ramayandi

    () (Department of Economics, Padjadjaran University)


This essay examines the choice of monetary policy instrument for a small open economy under flexible exchange rate regime with some reference to Indonesia. To approach the issue a simple ad-hoc aggregate supply-IS-LM model is used for the analysis. Although basically the issue concerning monetary instrument problem tend to be more empirical rather than theoretical, this essay argues that some rules of thumb could still be drawn from the analysis of the theoretical model to solve the problem. The recognition of the true behavioural relationship among aggregate variables in the economy is important as guidance for the optimal policy rule. The analysis also recognises that a credible commitment from the monetary authority towards the instrument chosen is important.

Suggested Citation

  • Arief Ramayandi, 2001. "Optimum Monetary Instrument Option in the Case of a Small Open Economy," Working Papers in Economics and Development Studies (WoPEDS) 200101, Department of Economics, Padjadjaran University, revised Sep 2001.
  • Handle: RePEc:unp:wpaper:200101

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    File Function: First version, 2001
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    References listed on IDEAS

    1. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    2. Ross McLeod, 1997. "Explaining chronic inflation in Indonesia," Journal of Development Studies, Taylor & Francis Journals, vol. 33(3), pages 392-410.
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    More about this item


    Monetary policy; small open economy;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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