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Indonesian Monetary Policy During the 1997-98 Crisis: A Monetarist Perspective

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  • George Fane

Abstract

This paper defends the IMF's strategy of targeting base money (M0) in 1997-98 against the criticism by Grenville (2000) that it was destined to fail because M0 is mainly demand determined and the demand for it was increased by a large and unpredictable amount by the banking panic. Grenville contends that Indonesian monetary policy should have aimed at domestic price stability. It is argued here that the growth of M0 far exceeded what could be justified by last resort lending to accommodate the banking panic, and that rapid inflation could only have been avoided by preventing most of the expansion of the public's cash holding that actually occurred. Achieving a modest target for domestic inflation would not therefore have been very different in practice from setting tight limits on the growth of M0. In contrast, both these policies would have been very different from the loss of control over M0 that actually occurred.

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  • George Fane, 2000. "Indonesian Monetary Policy During the 1997-98 Crisis: A Monetarist Perspective," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(3), pages 49-64.
    • Handle: RePEc:taf:bindes:v:36:y:2000:i:3:p:49-64
    DOI: 10.1080/00074910012331338953
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    References listed on IDEAS

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    1. Cukierman Alex, 1992. "CENTRAL BANK STRATEGY, CREDIBILITY, AND INDEPENDANCE: THEORY AND EVIDENCE: Compte Rendu par Dominique Cariofillo," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 581-590, December.
    2. Ross McLeod, 1999. "Crisis-Driven Changes to the Banking Laws and Regulations," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 35(2), pages 147-154.
    3. Lisa Cameron, 1999. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 35(1), pages 3-41.
    4. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, April.
    5. Stephen Grenville, 2000. "Monetary Policy and the Exchange Rate During the Crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(2), pages 43-60.
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    Cited by:

    1. Arief Ramayandi, 2001. "Optimum Monetary Instrument Option in the Case of a Small Open Economy," Working Papers in Economics and Development Studies (WoPEDS) 200101, Department of Economics, Padjadjaran University, revised Sep 2001.
    2. Magdalena Osinska & Marcin Blazejowski & Pawel Kufel & Tadeusz Kufel & Jacek Kwiatkowski, 2020. "Narrow Money Demand in Indonesia and in Other Transitional Economies – Model Selection and Forecasting," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 1291-1311.
    3. Narayan, Paresh Kumar, 2007. "Is money targeting an option for Bank Indonesia?," Journal of Asian Economics, Elsevier, vol. 18(5), pages 726-738, October.
    4. James, Gregory A., 2005. "Money demand and financial liberalization in Indonesia," Journal of Asian Economics, Elsevier, vol. 16(5), pages 817-829, October.
    5. Stephen Grenville, 2000. "“Indonesian Monetary Policy”: A Comment," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 36(3), pages 65-70.

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