ABSTRACT
Monetary policy is a key component of economic policy. It remains important for maintaining macroeconomic stability in general and price stability in particular. There is emerging consensus that the sole aim of monetary policy should be price stability. Largely for political reasons, however, practice remains short of this prescription. Developed countries frequently designate price stability as the principal target of monetary policy, reserving it for other targets as ‘circumstances require’. Consequently, their economies carry an inflationary bias in a dynamic sense. Most developing countries, as common principle, use monetary policy to target multiple objectives, such as low inflation, steady economic growth, equilibrium in the balance-of-payments, and interest and exchange-rate stability. They therefore remain even more susceptible to chronic inflationary pressure and episodes of price instability than developed countries. In Indonesia, the role of monetary policy since the 1960s has not been very different from that in other developing countries in Asia. Both the design and conduct of Indonesian monetary policy has evolved gradually, but can be characterized as having been reactive and triggered by crises.
