Independensi Kebijakan Moneter dalam Jangka Pendek: Kasus Indonesia

Using Capital Flow Model and Central Bank Reaction Function for the case of Indonesia before the current crisis, this paper found that during Indonesia implemented fixed exchange rate regime the monetary policy which was done by Bank of Indonesia has lost its independence. The regression results using Two Stage Least Square method show that the monetary policy during the period before the current crisis in Indonesia was very influenced by the behavior of private capital flows. To neutralize the liquidity effects of private capital inflows as a response to deregulation packages in financial and banking sector in the late of 1980s, Bank of Indonesia has actively implemented the sterilization policies. The regression results of the Central Bank Reaction Function indicate that Bank of Indonesia could not completely sterilize the liquidity effects of private capital inflows. This situation made the monetary policy undertaken by Bank of Indonesia lost its power to stabilize inflation in the economy. The phenomenon of high inflation which followed high economic growth (overheating economy) during the period before the current crisis has significantly reduced the index of competitiveness of Indonesian goods and services in the world market. This is one of the main factors that caused slower Indonesian export growth just before the crisis began in the mid of 1997. This situation made the level of supply of foreign exchange in domestic market dropped significantly, while on the other side the demand level increased as many big corporate businesses and government institutions needed foreign exchange to repay their foreign debt. Rupiah become unstable and public expectation for further devaluation widened. This was the beginning of the current crisis that until now put Indonesia into the deep trouble. Therefore, the most important contribution of this paper is its investigation to the linkage between deregulation and the current crisis. This paper recommends that one of the main factors that generate the Indonesian current crisis has showed up far before the crisis began. It was started when the monetary policy lost its power to stabilize inflation that was caused by behavior of private capital inflows as a response to the wrong sequence of deregulation policies in Indonesia.