INFLATION TARGETING UNDER IMPERFECT CREDIBILITY BASED ON ARIMBI (Aggregate Rational Inflation - Targeting Model for Bank Indonesia); LESSONS FROM INDONESIAN EXPERIENCE

  • Harmanta Harmanta Bank Indonesia
  • M. Barik Bathaluddin Bank Indonesia
  • Jati Waluyo Bank Indonesia

Abstract

This paper try to assess role of credibility in the implementation of inflation targeting framework in Indonesia. It illustrates how credibility may play an important role in the evolution of the Indonesian monetary policy. Knowing the degree of credibility would beneficial for Bank Indonesia (BI) to understand how to adjust policy instrument to achieve a long-term inflation target.

Scaled from zero (purely not credible) to one (perfect credibility), our quantitative measurements found that credibility index for Indonesian monetary policy converge to around 0.5. Refer to projection and simulation results in this paper, the study shows expectation inflation of economic agents is strongly influenced by monetary policy credibility. The more credible the monetary policy, the faster inflation expectation would anchor to its target. In addition, high credibility also increase the efficiency of the monetary policy transmission since the disinflation cost represented by sacrifice ratio is lower. Under imperfect credibility the central bank prefer to attain its inflation target gradually, and if the credibility stock is doubled, then achieving its long-term inflation target required a lot shorter time (approximately 0.4 periods than the baseline).

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Published
2011-05-30
How to Cite
Harmanta, H., Bathaluddin, M. B., & Waluyo, J. (2011). INFLATION TARGETING UNDER IMPERFECT CREDIBILITY BASED ON ARIMBI (Aggregate Rational Inflation - Targeting Model for Bank Indonesia); LESSONS FROM INDONESIAN EXPERIENCE. Buletin Ekonomi Moneter Dan Perbankan, 13(3), 281 -. https://doi.org/10.21098/bemp.v13i3.263
Section
Articles