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"Does Inflation Targeting Framework Make a Significant Difference in Lowering Price Level?" What is Its Implication to Indonesia’s Inflation Rate?

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  • Faisal Rachman

    (Master Degree in Public Policy, Lee Kuan Yew School of Public Policy, National University of Singapore)

Abstract

In the last two decades many countries have been starting to employ Inflation Targeting Framework (ITF) as their main monetary policy framework. This is done to achieve an objective of anchoring public expectation on inflation which in the end will steer the price level movement towards ITF’s ultimate target of relatively low and stable inflation rate. By conducting Difference-in-Difference method on panel data consisting of 5 countries implementing ITF since 2001 and 21 selected non-ITF countries for period 1990–2010, it is statistically proved that ITF adoption has a significant effect on inflation. In case of Indonesia, through Structural Break approach, the implementation of ITF since 2005 is also proved able to lower and stabilize inflation rate.

Suggested Citation

  • Faisal Rachman, 2015. ""Does Inflation Targeting Framework Make a Significant Difference in Lowering Price Level?" What is Its Implication to Indonesia’s Inflation Rate?," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 61, pages 131-147, August.
    • Handle: RePEc:lpe:efijnl:201510
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    References listed on IDEAS

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    1. Lin, Shu & Ye, Haichun, 2007. "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2521-2533, November.
    2. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
    3. Mrs. Alexandra Born & Mrs. Sarwat Jahan & Mr. Edward R Gemayel, 2011. "What Can Low-Income Countries Expect From Adopting Inflation Targeting?," IMF Working Papers 2011/276, International Monetary Fund.
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    More about this item

    Keywords

    Inflation; Inflation Targeting; Monetary Policy; Difference-in-Difference; Structural Break;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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