Proceedings of the 8th International Academic Conference on Management and Economics
Year: 2024
DOI:
[PDF]
Bank Indonesia Dares to Make the Interest Rate Gap with America Smaller
Dr. Dedy Ihsan
ABSTRACT:
According to Milton Friedman, inflation is an “old disease” that is always and everywhere in a monetary phenomenon. He also added that monetary policy has not to be backed up by fiscal policy to curb inflation. This means that monetary policy is an appropriate and proper tool when directed at achieving price stability or at the desired rate of price. Hence, the Fed through FOMC (Federal Open Market Committee) focuses on monetary policy to control inflation, either through the interest rate mechanism or reducing the Fed’s balance sheet. The results do show a decline in inflation, but it is still above the set target. Very much different from Indonesia, Bank Indonesia, as the central bank, not only uses monetary policy to manage inflation, but also applies a fiscal approach, by forming a National Inflation Control Team, which collaborates with the government via the Finance Department. Inflation Control Teams were also established in every province, district and city throughout Indonesia. The result is that the reduction in inflation figures is more effective, faster, and with very low persistence, without being completely dependent on the benchmark interest rate. In the end, the disparity between Indonesian and American interest rates narrowed. Bank Indonesia is not worried that there will be a capital outflow from the investment portfolio to America, as long as Indonesia’s real interest rate is still greater than America’s.
keywords: Inflation, Monetary Policy, Fiscal Policy, Inflation Control Teams, Low Persistence Inflation, Narrow Gap Interest Rates