• M. Maulana Al Arif
  • Achmad Tohari


This paper analyzes the impact of the inflation and the world interest rate on the Indonesian economy and the effectiveness of the Indonesian central bank policy to adopt the domestic macroeconomic fluctuation.

Assuming Indonesia as a small-open economy, the Stuctural Vector Autoregressive Model is utilized on the monthly data during the periode of 1999: 1 – 2004: 12 covering the main domestic macroeconomic indicator (output, price, money supply, interest rate and the exchange rate) and the world oil price and world interest rate as the disturbance source.

The analysis provides 2 main results, first, the international variables do have impacts on the domestic variables fluctuation, implying the fragility of the domestic economy due to the external shock, second, the monetary policy is effective on supporting the economic growth and stabilizing the price level. However, the Bank Indonesia policy to stabilize the international shock via the exchange rate channel, contributes to a higher impact of the international shock on domestic interest rate.

Keywords: monetary policy, business cycle, SVAR

JEL Classification: E52, E32, C32, F41


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