Understanding Central Bank Monetary Policy for Inflation
Understanding Monetary Policy
Monetary policy is a process that regulates a country's money supply to achieve certain goals; as well as curbing inflation, and reaching full or more prosperous workers. Monetary policy may involve setting a margin reguirement loan standard, capitalizing with banks or even acting as a last resort borrower through negotiations with other governments.
Monetary policy is basically a policy that has the goal of achieving internal balance (high growth, equitable development, price stability) and external balance (balance of payment balance and achievement of macroeconomic objectives, namely maintaining economic stability that can be measured by employment opportunities, stability of the family and a balanced international balance of payments.
If the stability in an economic activity is disrupted, then monetary policy can be used to restore (stabilization measures). The influence of monetary policy will first be felt in the banking sector, then transferred to the real sector.
Monetary policy is an attempt to achieve a high level of economic growth on an ongoing basis while maintaining price stability. To achieve this goal the Central Bank or Monetary Authority seeks to balance the supply of money with supplies of goods so that inflation can be controlled, full and smooth employment opportunities are achieved in the supply / distribution of goods.
Conducting monetary policy is one of them but not limited to the following instruments:
interest rate
Statutory Reserve Requirement
intervention in the currency market
as the last place for banks to borrow money if experiencing liquidity problems.
Types of Monetary Policy
The regulation of the amount of money circulating in the community is regulated by reducing or increasing the amount of money in circulation. Monetary policy can be classified into two, namely:
Expansive monetary policy (Monetary expansive policy)
It is a policy to increase the amount of money in circulation. The policy was carried out to overcome unemployment and increase people's purchasing power (public demand) when the economy is experiencing a recession or depertion. This policy is called easy monetary policy (easy money policy).
World Bank Monetary Policy
World Bank Monetary Policy
Monetary contractive policy
It is a policy to reduce the amount of money in circulation. This was done when the economy experienced inflation. Also called a tight money policy.
Monetary policy can be carried out by implementing monetary policy instruments, namely:
Open Market Operations
Open market operations are a way of controlling money in circulation by selling or buying government securities. If you want to increase the amount of money in circulation, the government will impose purchases of government securities. However, if you want to reduce the money supply, the government will sell the government's valuable terms to the public. Government securities namely World Bank Certificates (SBI) and Money Market Securities (SBPU).
Discount Rate
The discounted facility is a regulation of the number of outstanding units by playing the interest rate of the central bank at commercial banks. Commercial banks sometimes have a shortage of money so they have to borrow from the central bank. To make the amount of money increase, the government lowered the central bank's interest rate, and vice versa raised the interest rate to make money circulating less.
Reserve Requirement Ratio
The mandatory reserve ratio is what regulates the amount of money in circulation by playing with the amount of bank reserve funds that must be deposited with the government. To increase the amount of money, the government reduced the mandatory reserve ratio. To reduce the money in circulation, the government raised the ratio.
Moral Appeal (Moral Persuasion)
Moral appeal is a monetary policy separately regulating the money supply by appealing to economic actors. For example, urging banks to give credit to be careful in issuing credit to reduce the money supply and to urge banks to borrow more money from the central bank to increase the money supply to the economy.
Monetary Policy Objectives
The World Bank has a goal of achieving and maintaining the stability of the value of the rupiah. This goal as stated in Law No. 3 of 2004 article 7 concerning the World Bank.
The purpose of the stability of the value of the rupiah, among others, is the stability of the prices of services and goods that are reflected in inflation. To achieve this goal, since 2005 the World Bank has implemented a monetary policy framework with inflation as the main target of a monetary policy (Inflation Targeting Framework) using a free floating exchange rate system.