Definition, Objectives, and Monetary Policy Instruments
Understanding Monetary Policy
Monetary policy is basically a policy that aims to achieve internal balance (high economic growth, price stability, equitable development) and external balance (balance of payments balance) and the achievement of macroeconomic objectives, namely maintaining economic stabilization that can be measured by employment opportunities, price stability and a balanced international balance of payments.
If stability in economic activity is disrupted, monetary policy can be used to restore (stabilization measures). The influence of monetary policy will first be felt by the banking sector, which is then transferred to the real sector. Monetary policy is defined by the plans and actions of a coordinated monetary authority to maintain monetary balance, and stabilize the value of money, encourage smooth production and development, and expand employment opportunities to improve people's lives.
Wikipedia provides a definition of monetary policy with a process undertaken by the government, central bank, or monetary authority of a country to control, supply of money, availability of money, interest rates, in order to achieve a set of orientation goals for economic growth and stability. Where monetary policy is usually known as a choice between expansion policy or contraction policy.
So it can be concluded from the above understanding that monetary policy is all the efforts or actions of the central bank to influence monetary developments (money supply, interest rates, credit and exchange rates) to achieve certain economic goals. As part of macroeconomic policy, the purpose of monetary policy is to help achieve macroeconomic goals including: economic growth, employment opportunities, price stability and balance of payments. The four targets are the objectives / final targets of monetary policy (final target).
Ideally, all monetary policy objectives must be achieved simultaneously and sustainably. However, experience in many countries, including the world, shows that this is difficult to achieve, and there is even a contradictory tendency. For example, contractive monetary policies to curb inflation can have a negative effect on economic growth and job creation.
Types of Monetary Policy
Monetary policy is basically a policy that aims to achieve internal balance (high economic growth, price stability, equitable development) and external balance (balance of payments balance) and the achievement of macroeconomic objectives, namely maintaining economic stabilization that can be measured by employment opportunities, price stability and a balanced international balance of payments.
If stability in economic activity is disrupted, monetary policy can be used to restore (stabilization measures). The influence of monetary policy will first be felt by the banking sector, which is then transferred to the real sector. Monetary policy can be classified into two namely:
Expansive monetary policy (Monetary expansive policy)
Is a policy in order to increase the amount of money in circulation. This policy is carried out to overcome unemployment and increase people's purchasing power (public demand) when the economy experiences a recession or depression. This policy is also called easy monetary policy (easy money policy)
Monetary contractive policy
Is a policy in order to reduce the amount of money in circulation. This policy is carried out when the economy experiences inflation. Also called the tight money policy (tight money policy)
Monetary Policy Objectives
Bank has the objective to achieve and maintain the stability of the value of the rupiah. This objective as stated in Law No. 3 of 2004 article 7 concerning Bank. What is meant by the stability of the value of the rupiah, among others, is the stability of the prices of goods and services reflected in inflation.
To achieve this goal, since 2005 Bank has implemented a monetary policy framework with inflation as the main target of monetary policy (Inflation Targeting Framework) by adopting a free floating exchange rate system. The role of exchange rate stability is very important in achieving price stability and the financial system. Therefore, Bank also operates an exchange rate policy to reduce excessive exchange rate volatility, not to direct the exchange rate to a certain level.