The framework provides a nominal anchor for economic actors in forming their inflation expectations and forecasting monetary policy. The most important point where monetary policy can affect inflation is when economic actors anchor their inflation expectations to the central bank's target. A central bank that can manage inflation expectations will have an effective monetary policy, hence a credible monetary policy (Blinder, 1999).
Several studies indicate that problems with the credibility of monetary policy may arise due to economic actors' uncertainty about the preferences of monetary authorities. Numerous studies show that the disinflation strategy is strongly influenced by the credibility of monetary policy. In the next session of this paper, the backgrounds of development models and the credibility of monetary policy will be explained.
An important assumption in the model is that the achievement of inflation targeting at minimum cost is strongly influenced by the credibility of monetary policy. There are two ways to capture the dynamics of monetary policy credibility in a model, either by letting this credibility variable be exogenous or endogenous. By modeling the credibility of monetary policy to be exogenous, we assume that the credibility of monetary policy follows the autoregressive AR(1).
In this case, the greater the credibility of the monetary policy, the closer the inflation expectation is to the target, i.e. the earlier the actual inflation is anchored to the target.
METHODOLOGY
The range of this parameter is obtained based on historical average consideration of existing and vision together with the Indonesian government that would be aimed for the long term. If a steady state value is assumed as mentioned above, it implies that the steady state real interest rate is 1.5%, the nominal interest rate is 4.5%, US Cpiplus parameter is a new feature in this model that illustrates maximum addition to inflation expectations if the central bank has no credibility.
In developing and using ARIMBI with imperfect credibility, we need to know the value of central bank credibility under the current circumstances as an initial value. From a forecasting perspective, the credibility value is entered as the initial value when the data was available on the actual date. For example, if you start forecasting in the second quarter of 2009, the measured credibility indices will be the starting value in the first quarter of 2009.
The credibility measurement of the Bank Indonesia index would take place in two approaches, Valentin and Rozalia (VR, 2008) and Cecchetti and Krause (CK, 2002). Data on target inflation are used for the annual data of 2002-2009 both in the setting of the target by BI and by the government with contributions from the central bank. A previous study (Harmanta, 2009) using Bayesian estimation of small aperture DSGE models with a data period of 2000–2008 provides results.
In general, it is believed that the current credibility of Bank Indonesia's monetary policy is not quite perfect (imperfect credibility). But in the long term, together with Bank Indonesia's communication / transparency / consistency, it is believed that the credibility of monetary policy will slowly and surely increase. The long-term inflation target to be achieved with the implementation of the ITF in Indonesia reached 3% + 1% (see eg Bank Indonesia's Monetary Policy Report).
According to the aforementioned measurement of the credibility of monetary policy (based on the measurement method in the style of Cecchetti and Krause (2002), the results of the SKDU survey and some results of previous studies (Harmanta, 2009), the initial value of the credibility of monetary policy is approximately 0.5. In order to seen the influence of monetary policy credibility on the dynamics of macroeconomic variables, especially in the medium-term target length of inflation with minimal costs, there are three scenarios of monetary policy credibility, namely: (i) baseline credibility with an initial value of 0.5, (ii) less credible with an initial value 0.1 and (iii) more credible with an initial value of 0.9.
RESULTS AND ANALYSIS
- Inflation Behavior and Expectation in Indonesia
- Initial Credibility Index
- Simulation Results of Exogenous Credibility
- Simulation Results of Endogenous Credibility
- Simulation Results : Comparison of Baseline and Late Scenario
- Periods for Disinflation Process
Therefore, in formulating monetary policy, inflation expectations must be taken into account in order to achieve the inflation target. Reducing the degree of inflation persistence would thus reinforce the growing role of monetary policy in controlling inflation. Therefore, the credibility of monetary policy is essential to achieve a central bank's goal of low and stable inflation.
If, within the ITF, economic agents believed that monetary policy would be able or credible to achieve its inflation target, economic agents' inflation expectations would soon become anchored to the inflation target, so that actual inflation would also be. Observations of the Indonesian economy show that the credibility of monetary policy in Indonesia is relatively low and contributes to the persistence of high inflation (Harmanta, 2009). However, following the implementation of the ITF, the credibility of monetary policy has improved.
Their study indicates that the formation of inflation expectations experienced by pointing to target inflation as the main goal of monetary policy in the ITF era would facilitate the learning process of economic subjects better than the non-ITF era with multiple goals. An important implication of these findings is that inflation persistence is not an inherent feature of an economy, but diversity related to the credibility of monetary policy. The Kalman gain parameter reflects the learning process of economic agents about target inflation, so that monetary authorities can be used as a measure of the degree of credibility of monetary policy.
The faster economic actors learn about the inflation target of the monetary authorities, the higher the degree of credibility of the monetary policy. Observing the dynamics of economic actors in the pursued monetary policy by looking at the actual inflation compared to the inflation target. As already mentioned above, the index measuring the credibility of monetary policy is carried out using VR2008 and CK 2002.
The measurement results showed that the credibility of monetary policy in Indonesia during the period was not quite perfect (imperfect credibility). From a cost of disinflation perspective, the scenario of a more credible monetary policy would cause the sacrifice ratio (output loss that occurred before the 1% drop in inflation) to be lower than baseline. In the late scenario, assuming that the monetary policy credibility of the initial value is equal to the base value of 0.5, a delay in the increase in the policy response ratio would cause the inflation trajectory to be higher than the baseline.
In the medium term, the sluggish monetary policy response would provide a better path to weaken the exchange rate compared to the base scenario. It is argued that endogenous credibility might better cushion the reward-punishment against the inflation target because the credibility of monetary policy is explicitly determined by the deviation of inflation from the inflation target.
CONCLUSIONS
The more credible monetary policy, the lower the costs of disinflation (reflected in the Sacrifice ratio) to achieve low and stable inflation and in the medium term - long. More controlled inflation at a low and stable level would provide favorable conditions for sustainable economic growth and controlled exchange rate volatility. Therefore, it will lead to a longer time to reach the target, higher interest rates and higher costs of disinflation.
The implication is that controlling inflation expectations is very important, although not easy, because it requires credible monetary policy. This condition could be constructed by continuing to demonstrate consistent adherence to the inflation target. The simulation results support the mandate of Bank Indonesia Act No. 23 of 1999 and No. 3 of 2004 requiring Bank Indonesia to publicly disclose its inflation target and that inflation be the overarching objective of monetary policy through the implementation of the inflation target framework (ITF) . .
The implementation of the ITF is an attempt to increase the credibility of monetary policy by committing to the achievement of the inflation target so that economic agents calculate their activities based on the inflation rate and the disinflation program. Regarding its limitations and further research opportunities, the dynamics of monetary policy credibility is modeled linearly.
Kredibilitas kebijakan moneter dan dampaknya terhadap persistensi inflasi dan strategi disinflasi di Indonesia: dengan model Dynamic Stochastic General Equilibrium (DSGE)Δ. Model kebijakan moneter multi negara dari Bank IndonesiaΔ. Direktorat Riset Ekonomi dan Kebijakan Moneter, Dokumen Kerja WP/02/2009, Bank Indonesia. Bagaimana seharusnya bank sentral mengurangi inflasi: masalah konseptualΔ. 5-32, Federal Reserve Bank of Kansas City. 2003), ≈Guncangan kebijakan permanen dan sementara dalam model makro empiris dengan informasi asimetrisΔ, Makalah Kerja Penelitian, no.
