TOWARDS IMPLEMENTATION OF INFLATION TARGETING IN INDONESIA

Abstract

The experience of high inflation accompanying the economic crisis in 1998 has brought back painful memories of hyperinflation in the 1960s. Success with inflation targeting (IT) in other countries has prompted Indonesia to consider this framework as the basis for monetary policy,a response that seems justified on at least two grounds. First, monetary policy needs a new anchor after the abandonment in 1997 of the previous regime of managed floating. Second, the central bank law enacted in 1999 prescribes stability of the value of the rupiah as Bank Indonesia's sole objective. This paper explores the future framework of monetary policy under a formal IT approach and highlights the constraints Bank Indonesia faces in implementing such an approach. It discusses the monetary policy framework before and during the crisis, and in the post-crisis period. It then goes on to outline a preliminary design for a suitable IT framework for Indonesia.