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Optimum Monetary Instrument Option in the Case of a Small Open Economy

Author

Listed:
  • Arief Ramayandi

    (Department of Economics, Padjadjaran University)

Abstract

This essay examines the choice of monetary policy instrument for a small open economy under flexible exchange rate regime with some reference to Indonesia. To approach the issue a simple ad-hoc aggregate supply-IS-LM model is used for the analysis. Although basically the issue concerning monetary instrument problem tend to be more empirical rather than theoretical, this essay argues that some rules of thumb could still be drawn from the analysis of the theoretical model to solve the problem. The recognition of the true behavioural relationship among aggregate variables in the economy is important as guidance for the optimal policy rule. The analysis also recognises that a credible commitment from the monetary authority towards the instrument chosen is important.

Suggested Citation

  • 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.
    • Handle: RePEc:unp:wpaper:200101
    as

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    File URL: http://lp3e.fe.unpad.ac.id/wopeds/200101.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Malcolm Edey, 1997. "The Debate on Alternatives for Monetary Policy in Australia," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    3. Taylor, John B, 2000. "Alternative Views of the Monetary Transmission Mechanism: What Difference Do They Make for Monetary Policy?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 60-73, Winter.
    4. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    5. Ross McLeod, 1997. "Explaining chronic inflation in Indonesia," Journal of Development Studies, Taylor & Francis Journals, vol. 33(3), pages 392-410.
    6. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 1-32, Winter.
    7. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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    More about this item

    Keywords

    Monetary policy; small open economy;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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