Given the unique nature of annual growth of nominal cash series, we further explore its relationship with CPI inflation. In the two charts, the circle points mark the turning points of the CPI inflation series, while the diamond points mark the turning points of the annual growth rate of the nominal cash series. The arrows pointing to the right indicate the leading relationships between the turning points of annual nominal cash growth and the turning points of CPI inflation.
As depicted in the graphs, the main relationship from the turning points of annual nominal money growth to the turning points of CPI inflation changes overtime. The presence of the main relationship from the annual growth of nominal narrow money (base money, cash and M1) to CPI inflation in Indonesia echoes the statements of the monetarist school of thought, as presented in Friedman and Schwartz and Friedman ( 1974). It is calculated in table 3 that the turning points of the annual changes of Rp/.
To close the connection, we see how the movements in annual growth in nominal M1 lead to the movements in CPI inflation.
THE EFFECTIVENESS OF A MONETARY TARGET AND POLICY THE EFFECTIVENESS OF A MONETARY TARGET AND POLICY
In the graph, we have presented the annual growth of nominal excess money over its real need for consumption expenditures (money disequilibrium). In this way we can ask questions such as: (1) whether peaks in the inverted rate (or troughs in the non-inverted rate) correspond to peaks (highest values) in the annual growth of money imbalances, and (2) whether the limits on the inverted rate (or higher values in the non-inverted rate) correspond to the limits (lower values) in the annual growth of money imbalances. Peaks/troughs in the nominal 1-month inverted term deposit rate (representing the lowest/highest values in the non-inverted rate) always correspond to peaks/troughs in the annual growth of money imbalances.
Since 1990, movements in nominal interest rates on one-month deposits have driven movements in the annual growth of cash imbalances. Moreover, we can roughly estimate the length of the lag in the effects of SBI policy on inflation. We have calculated above that the fluctuations in the inverse nominal interest rate on one-month time deposits are on average 7.5 months or about 3 quarters ahead of the fluctuations in the annual growth of cash imbalances.
Therefore, monetary policy is preemptively attacking the effects of the excess money pipeline on commodity market price inflation. As a result, a further decline in the SBI rate even when done cautiously could result in a reduction in the ability of the BI to control the annual growth of the nominal money balance. The impact of the uncertainty-driven excessive narrow nominal money growth (represented by the M1 imbalance) in 2000 was felt directly in the market for imported goods39.
The reduction in the annual growth of the excess nominal narrower money balance continued after 2001. This contributed to a significant reduction in the annual growth of nominal primary money from the beginning of 2002, as excess nominal cash was reabsorbed back into financial intermediaries. By mid-2002, the annual growth of nominal primary money fell within the indicative target upper limit, which means the disappearance of the monetary imbalance in the economy.
ENHANCING THE OVERALL MONETARY POLICY FRAMEWORK ENHANCING THE OVERALL MONETARY POLICY FRAMEWORK ENHANCING THE OVERALL MONETARY POLICY FRAMEWORK
One of the main characteristics of the ECB-type strategy is the use of formal and transparent criteria of full information in the formulation of monetary policy. The monetary policy decision-making process of the ECB can be categorized as a structured and transparent decision-making process with full information, illustrated in the diagram. At the bottom of the diagram is the input to the decision-making process, namely all relevant economic information used to assess risks to price stability in the Eurozone.
The first pillar of the ECB's monetary policy strategy involves the use of the benchmark M3 as a guide for monetary policy decisions. After deriving the reference value of M3 growth in the amount of 4.5%, the analysis of monetary policy in the first pillar is aimed at assessing risks to price stability due to deviations of actual M3 growth from the publicly announced reference value of M3 growth (monetary imbalance). Instead, ECB staff will analyze the sources of such persistent deviations of real M3 growth from its reference value.
In the framework of the ECB's first pillar strategy, the interest rate policy stance is formed after examining the results of the analyzes carried out in both the first and second pillars. Meanwhile, the second pillar of the ECB's strategy is the use of a broad-based assessment of the outlook for price developments. We argue that the adoption of a transparent comprehensive information strategy, similar to the ECB strategy described above, could also be implemented in Indonesia.
As their work was carried out in the run-up to Indonesia's post-crisis inflation targeting regime, then it clearly reflects the same kind of analysis as carried out under the second pillar of an ECB-type strategy. By adopting a forward-looking decision rule such as the direct inflation targeting framework, private agents will perceive that the central bank also "speaks" their language. The circular dots indicate the turning points of CPI inflation, and the diamond dots the turning points of the annual growth of the monetary imbalance.
In the table, we report the average of the annual changes in cash imbalances and CPI inflation over the peak-to-peak and trough-to-trough cycles52. We also report the length of the lead relationship from cycles of cash disequilibrium to cycles of CPI inflation.
CONCLUSIONS CONCLUSIONS CONCLUSIONS
Since rational players use a complete information set to construct their conditional inflation forecasts, treating monetary analysis of inflation as marginal information would be a futile step for BI, especially if there is evidence that in the long run inflation is also a monetary phenomenon may be in Indonesia. The danger will increase if the current base monetary target framework continues to deliver satisfactory results in keeping inflation low and stable in 2003. Such results will reinforce the idea that inflation is a monetary phenomenon in Indonesia in the long run.
Therefore, there is merit in the formal adoption of the ECB type two pillars strategy in the future overall framework of monetary policy in post-crisis Indonesia. Such a strategy avoids the marginal treatment of money and will ensure sophisticated agents in the market that BI also uses complete information criteria in the formulation of its monetary policy. This assurance can then prompt agents to act according to the policy stance and inflation target set by BI.
Another factor that has provided support is BI's overriding commitment to stick strictly to the targeted monetary base. In the future, given the level of sophistication of agents in the financial market and to some extent in the goods market, it is preferable that BI use a formal and transparent full information strategy to formulate its monetary policy in post-crisis Indonesia. This amounts to adopting a monetary policy framework similar to the one used by the ECB.
APPENDIX APPENDIX APPENDIX
The second objective is to see the plausibility of the excess nominal monetary imbalances having a feedback effect on the real growth of domestic household consumption. The long-run specification of the demand for real M1 money estimated jointly with the Fisher ratio. Real M1 money is jointly estimated with the Fisher ratio. Real M1 money is jointly estimated with the Fisher ratio. Real M1 money is jointly estimated with the Fisher ratio. Real M1 money is estimated jointly with the Fisherman. Ratio Imposed rank =2, x*. Except for the periods in 1998 and 1999, the fluctuations of the imbalances are more or less contained within the +/- 0.1 deviations from monetary equilibrium.
It is important to further assess whether such deviations in 1998–1999 represent systematic breaks in the overall trend of the underlying variables or not. Section II of the paper presented several approaches to further examine this issue. The results of further studies may/may not change the results obtained so far in the sense that our conclusions about the weak exogeneity status of the condition variables in Table 6 may/may not change.
Using the long-run specification in Table 5, we estimate the Equilibrium Correction Model (EqCM) of demand for real M1 in Indonesia. Given this second feature, we assume that the broad swings in M1 disequilibrium during 1998-1999 in Chart 2 do not represent the following non-systematic specification of the prior EqCM in Table 7, with long-term stability of the equation shown in Chart 3a and its fit and residual values are shown in Chart 3b. Third, we find some evidence of serial correlations in the residuals that may cloud our judgment on the relative strength of the coefficients of R, the coefficients of interest to monetary policy makers.
It should be noted that the inclusion of these dummies occurs after we have established the functional stability of the demand for real M1 as suggested in Graph 3a. It is now of direct interest to see the stability of the parameters before the inclusion of these dummies. From graph 4, we note that only the coefficients of R exhibit parameter non-constancy during the emergence of the 1997 monetary crisis.
From Table 8, we can see that the elasticity of the long-run adjustment coefficient of real M1 balance is about -0.17±0.05. Nevertheless, we keep the other lags to get a more complete picture of the strength of this political variable.
