Economic Analysis of the Exchange Rate Channel and Monetary Policy Rule : The Case of Indonesia
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概要
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After the Asian financial crisis, Indonesia changed its exchange rate system from amanaged floating to flexible type, allowing market forces greater influence indetermining the country's exchange rate. While the managed floating exchange ratesystem has brought predictable results to a certain extent it has also created newchallenges for Indonesian monetary policy. It is quite difficult to propose appropriatepolicies towards inflation targeting without quantifying the impact of monetary policy.At the same time, identifying possible links between the floating exchange rate andmonetary rules is also rather challenging. The objective of this paper is to examinethe links between the exchange rate channel and a proper monetary policy ruletoward an inflation targeting framework for Indonesia. The paper employs a smallmacroeconometric model based on the IS-LM-Philips Curve type developed by Batini-Haldane (1999). Our finding is that the exchange rate in Indonesia is becoming lessvolatile, but both the magnitude changes in the rupiah (Indonesian currency) as wellas depreciation are quite high. We also find that in a small open economy such asIndonesia, it is difficult to implement inflation targeting directly without takingexchange rate movements into consideration. Under these circumstances, it isrecommended that the Central Bank of Indonesia should apply optimal monetarypolicy rules to the exchange rate as the reaction function. Optimal monetary policycan better stabilize the whole economy regardless of the fact that using the`exchange rate into policy' rule does not yield a better value of loss function.
著者
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Zams Bastian
The Central Bank of Indonesia
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Cooray Nawalage
Graduate School of International Relations, International University of Japan
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Cooray Nawalage
Graduate School Of International Relations International University Of Japan