Monetary Policy Function
In its implementation, Bank Indonesia has the authority to conduct monetary policy through setting monetary targets (such as money supply or interest rates) with the main objective of maintaining the inflation rate target set by the Government. Operationally, controlling these monetary targets uses instruments, including open market operations on the money market both in rupiah and foreign currencies, setting discount rates, setting minimum reserve requirements, and arranging credit or financing. Bank Indonesia can also use monetary control methods based on Sharia Principles.
In general, the objectives of monetary policy include:
Circulate the currency as a medium of exchange (medium of exchange) in the economy.
Maintaining a balance between economic liquidity needs and price level stability.
Optimal liquidity distribution in order to achieve the desired economic growth in various economic sectors
Help the government carry out its obligations which cannot be realized through normal sources of revenue.
Maintaining Economic Stability This means that the flow of goods and services is balanced with the growth of goods and services available.
Maintaining Price Stability. The price of an item is the result of interaction between the amount of money in circulation and the amount of money available in the market.
Increasing employment opportunities, when the economy is stable employers will make investments to increase the amount of goods and services so that the investment will open new jobs so as to expand employment opportunities.
Improving the Trade Balance of Community Work By increasing exports and reducing imports from abroad entering the country or vice versa.
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Monetary Policy Function
From the notion of monetary policy is a policy taken by the government (Central Bank) to increase and decrease the amount of money in circulation.
Since 1945, monetary policy has only been used as economic policy to achieve short-term economic stability. The fiscal policy is used in long-term economic control. But at this time monetary policy is the main policy used for short-term and long-term economic control. To influence the money supply, the government can implement a tight money policy and a loose money policy.
1. Tight Money Policy, namely the policy of the Central Bank to reduce the amount of money in circulation by:
a. Increase interest rates
b. Selling securities
c. Increase in cash reserves
d. Limit lending
2. Easy Money Policy, which is a policy carried out by the Central Bank to increase the amount of money in circulation by:
a. Lower interest rates
b. Buy securities
c. Decrease cash reserves
d. Give loose credit.
Considering the specific tasks carried out by Bank Indonesia, Bank Indonesia cannot fully control inflation, especially inflationary pressure originating from the supply side (cost push inflation). Bank Indonesia, through monetary policy, can influence inflation on the demand side, such as investment and public consumption. For example, a policy of increasing interest rates can 'redeem' public and government spending so that it can reduce overall demand, which in turn can reduce inflation. In addition, the increase in interest rates can strengthen the exchange rate through an increase (positive) interest rate differential.
Likewise, Bank Indonesia can influence public expectations through consistent and credible policies. The hope is that the inflation target of Bank Indonesia is referred to by the public and economic actors so that the inflation that occurs can be the same or close to the inflation target. If this condition occurs, then the cost of monetary control can be minimized.