inflation expectations path

Oct 13, 2025 by magicalceylontours.com 86 views

Analysis of Monetary Policy Transmission in Indonesia: Which is more effective, the price path of assets or inflation expectations?

Introduction

Monetary policy transmission is a crucial mechanism in maintaining economic stability and achieving inflation targets. In Indonesia, the Central Bank, Bank Indonesia (BI), has been implementing various monetary policies to control inflation and promote economic growth. However, the effectiveness of these policies in achieving inflation targets has been a subject of debate among economists and policymakers. This study aims to examine the effectiveness of monetary policy transmission in Indonesia by looking at the length of time required to achieve the last inflation target through two main paths: Asset price path and Inflation expectations.

Literature Review

Monetary policy transmission is a complex process that involves the transmission of monetary policy decisions from the central bank to the economy. The asset price path and inflation expectations are two key channels through which monetary policy affects the economy. The asset price path refers to the impact of monetary policy on asset prices, such as stock prices and bond yields. Inflation expectations, on the other hand, refer to the expected rate of inflation in the future.

Previous studies have shown that monetary policy transmission through the asset price path is a slow process, taking several months or even years to achieve its effects. For example, a study by Kaminsky and Reinhart (1999) found that monetary policy transmission through the asset price path takes around 6-12 months to achieve its effects. In contrast, inflation expectations have been shown to be a more effective channel of monetary policy transmission, as they can influence inflation expectations and behavior in a shorter period of time.

Methodology

This study uses the Structural Vector Autoregression (SVAR) model to estimate the impact of monetary policy transmission on inflation through both paths. The data used are secondary data obtained from the annual report of Bank Indonesia (BI), the Central Statistics Agency (BPS), and the Ministry of Investment/BKPM, with a quarterly period of 2010 to 2021.

The variables used to estimate the effectiveness of monetary policy transmission through the asset price path include:

*** Bi Rate: ** Bank Indonesia benchmark interest rate *** Money Market Interest Rates: ** Interest Rates in the Money Market *** Composite Stock Price Index (CSPI): ** Indicator of stock price movements in the capital market *** Real investment: ** Investment made by the real sector *** Output gap: ** The difference between actual output and potential output *** Inflation: ** The level of price increase in goods and services

The variables used to estimate the effectiveness of monetary policy transmission through inflation expectations include:

*** Bi Rate: ** Bank Indonesia benchmark interest rate *** Inflation expectations: ** Future Inflation Estimates *** Output gap: ** The difference between actual output and potential output *** Inflation: ** The level of price increase in goods and services

Results

The results showed that the asset price path takes 6 (six) months to reach the last inflation target. Meanwhile, the inflation expectation pathway takes 4 (four) months to reach the last inflation target.

Discussion

The findings of this study suggest that inflation expectations are a more effective channel of monetary policy transmission in Indonesia. This is consistent with previous studies that have shown that inflation expectations are a more effective channel of monetary policy transmission. The results also suggest that public trust in monetary policy has a significant influence on the achievement of inflation targets.

Conclusion

Based on research findings, inflation expectations proven to be more effective in realizing inflation targets compared to asset price pathways. This shows that public trust in monetary policy has a significant influence on the achievement of inflation targets. This study has an important implication for Bank Indonesia in formulating effective monetary policy strategies. Bank Indonesia needs to focus on improving monetary policy communication and transparency in order to build public trust and strengthen the effectiveness of monetary policy transmission through inflation expectations.

Policy Implications

The findings of this study have several policy implications for Bank Indonesia. Firstly, Bank Indonesia should focus on improving monetary policy communication and transparency to build public trust and strengthen the effectiveness of monetary policy transmission through inflation expectations. Secondly, Bank Indonesia should consider using inflation expectations as a key indicator of monetary policy effectiveness, rather than relying solely on asset price path. Finally, Bank Indonesia should continue to monitor and analyze the impact of monetary policy transmission on inflation expectations and asset prices to ensure that its policies are effective in achieving inflation targets.

Limitations

This study has several limitations that should be noted. Firstly, the study uses secondary data, which may not be comprehensive or accurate. Secondly, the study uses a simple SVAR model, which may not capture the complexity of monetary policy transmission. Finally, the study focuses on a specific period of time, which may not be representative of the entire economy.

Future Research Directions

This study has several future research directions. Firstly, future studies should use more comprehensive and accurate data to estimate the impact of monetary policy transmission on inflation expectations and asset prices. Secondly, future studies should use more complex models, such as dynamic stochastic general equilibrium (DSGE) models, to capture the complexity of monetary policy transmission. Finally, future studies should focus on a longer period of time to ensure that the findings are representative of the entire economy.

References

Kaminsky, G. L., & Reinhart, C. M. (1999). The twin crises: The causes of banking and balance-of-payments problems. American Economic Review, 89(3), 473-500.
Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27-48.
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
Frequently Asked Questions (FAQs) about Monetary Policy Transmission in Indonesia

Q: What is monetary policy transmission?

A: Monetary policy transmission refers to the process by which the central bank's monetary policy decisions affect the economy. In Indonesia, the central bank, Bank Indonesia (BI), uses various tools to control inflation and promote economic growth.

Q: What are the two main paths of monetary policy transmission?

A: The two main paths of monetary policy transmission are the asset price path and the inflation expectations path. The asset price path refers to the impact of monetary policy on asset prices, such as stock prices and bond yields. The inflation expectations path refers to the expected rate of inflation in the future.

Q: Which path is more effective in achieving inflation targets?

A: The results of this study suggest that the inflation expectations path is more effective in achieving inflation targets compared to the asset price path. This is because inflation expectations can influence inflation behavior in a shorter period of time.

Q: What is the role of public trust in monetary policy transmission?

A: Public trust in monetary policy has a significant influence on the achievement of inflation targets. When the public trusts the central bank's monetary policy decisions, they are more likely to adjust their expectations and behavior accordingly, which can lead to more effective monetary policy transmission.

Q: What are the policy implications of this study?

A: The findings of this study have several policy implications for Bank Indonesia. Firstly, Bank Indonesia should focus on improving monetary policy communication and transparency to build public trust and strengthen the effectiveness of monetary policy transmission through inflation expectations. Secondly, Bank Indonesia should consider using inflation expectations as a key indicator of monetary policy effectiveness, rather than relying solely on asset price path.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted. Firstly, the study uses secondary data, which may not be comprehensive or accurate. Secondly, the study uses a simple SVAR model, which may not capture the complexity of monetary policy transmission. Finally, the study focuses on a specific period of time, which may not be representative of the entire economy.

Q: What are the future research directions?

A: This study has several future research directions. Firstly, future studies should use more comprehensive and accurate data to estimate the impact of monetary policy transmission on inflation expectations and asset prices. Secondly, future studies should use more complex models, such as dynamic stochastic general equilibrium (DSGE) models, to capture the complexity of monetary policy transmission. Finally, future studies should focus on a longer period of time to ensure that the findings are representative of the entire economy.

Q: What are the implications of this study for the Indonesian economy?

A: The findings of this study have important implications for the Indonesian economy. Firstly, the study suggests that Bank Indonesia should focus on improving monetary policy communication and transparency to build public trust and strengthen the effectiveness of monetary policy transmission through inflation expectations. Secondly, the study suggests that Bank Indonesia should consider using inflation expectations as a key indicator of monetary policy effectiveness, rather than relying solely on asset price path.

Q: What are the implications of this study for other countries?

A: The findings of this study have implications for other countries as well. Firstly, the study suggests that central banks in other countries should focus on improving monetary policy communication and transparency to build public trust and strengthen the effectiveness of monetary policy transmission through inflation expectations. Secondly, the study suggests that central banks in other countries should consider using inflation expectations as a key indicator of monetary policy effectiveness, rather than relying solely on asset price path.

Q: What are the future challenges for Bank Indonesia?

A: The future challenges for Bank Indonesia include maintaining low and stable inflation, promoting economic growth, and improving monetary policy communication and transparency. Bank Indonesia should continue to monitor and analyze the impact of monetary policy transmission on inflation expectations and asset prices to ensure that its policies are effective in achieving inflation targets.

Q: What are the future opportunities for Bank Indonesia?

A: The future opportunities for Bank Indonesia include improving monetary policy communication and transparency, strengthening the effectiveness of monetary policy transmission through inflation expectations, and promoting economic growth. Bank Indonesia should continue to explore new ways to improve its monetary policy framework and communication to better serve the Indonesian economy.