Monetary Policy Operations and Instruments

Monetary Policy Operations and Instruments
Substitution of money
This policy is to replace old money with new money with a comparison of old money worth Rp. 1000, - replaced with new money with a nominal value of one rupiah. This policy was implemented at the end of the Sukarno policy or the beginning of the Suharto government.

Devaluation
Devaluation is related to the government's policy to reduce the value of domestic money against the value of foreign money.

Monetary Policy Operations
Monetary policy operations consist of monetary instruments, operational targets, intermediate targets, and final targets.

Monetary instruments
Monetary policy can be carried out by implementing monetary policy instruments, which include:

1. Open Market Operations
This instrument is the most important monetary policy tool because it is the main determinant between changes in interest rates and the monetary base and is the main source for influencing fluctuations in the money supply. Open market operations include the act of selling or buying government securities. If you want to increase the money supply, the government will buy government securities. However, if you want the amount of money circulating to decrease, the government will sell government securities to the public. Government securities include, among others, SBI (Bank Indonesia Certificates) and SBPU (Money Market Securities).
Open market operations have two main influences on money market conditions, namely first, increasing the reserves of commercial banks that participate in transactions. This is because in the purchase of securities for example, the central bank will increase the reserves of commercial banks that sell the securities, consequently commercial banks can increase the amount of money in circulation (through the process of creating credit). When the central bank sells securities on the open market, the reserves of commercial banks will decrease. Next these banks were forced to reduce lending, thereby reducing the money supply. The second effect, the act of buying or selling securities will affect the price (and thus also the interest rate) of the securities, thereby reducing the money supply and increasing the interest rate.

Based on its objectives, tebuka market operations are divided into two types namely:
Dynamic open market operation
Aims to change the amount of reserves and monetary base.
Defensive open market operations
Aims to control other factors that can affect the amount of reserves and monetary base.
2. Discount Rate
This policy includes actions to change the interest rate that must be paid by commercial banks in terms of borrowing funds from the central bank. This policy basically aims to influence the discount rate which in turn will affect the money supply through changes in loan interest rates. By increasing the discount, the cost of borrowing funds from the central bank will rise so that it will reduce the desire of commercial banks to lend to the central bank. As a result, the money supply can be reduced or reduced. In addition, the position of the amount of reserves can also be influenced through this instrument. If the discount rate increases, it will increase the cost of borrowing at the bank. This increase in reserves is an indication that the central bank is implementing a strict monetary policy.

3. Stipulation of minimum reserve requirements (minimum reserve requirements)
The mandatory reserve ratio is regulating the amount of money in circulation by playing the amount of bank reserve funds that must be deposited with the government. If the minimum required reserve is lowered, it will cause an increase in the amount of deposits so that the money supply tends to increase and vice versa if the minimum required reserve is increased, it will reduce the amount of deposits which will ultimately reduce the amount of money in circulation. So as to increase the amount of money, the government reduced the mandatory reserve ratio. To decrease the money supply, the government raised the ratio.

4. Moral Appeal (Moral Persuasion)
Moral appeal is a monetary policy to regulate the money supply by appealing to economic actors. This policy was carried out by Bank Indonesia by asking or urging banks to always consider the macroeconomic conditions and micro conditions of each bank in preparing a reality loan expansion plan. This moral persuasion policy is basically intended to encourage banks to always apply the precautionary principle in providing credit,
to reduce the money supply and urge banks to borrow more money from the central bank to increase the money supply to the economy while still giving banks the freedom to grow and develop based on market mechanisms.