Inflation Targeting under Imperfect Credibility Based on the Aggregate Rational Inflation-Targeting Model for Bank Indonesia (ARIMBI): Lessons from the Indonesian Experience

Abstract

Credibility is one of the central issues in conducting monetary policy. It is necessary in order to anchor the economic agents’ expectation on the central bank’s inflation target. A central bank which is capable of managing the public’s expectation of inflation in a proper manner would able to implement monetary policy more effectively and efficiently. This paper attempts to assess the role of credibility in the implementation of the inflation targeting framework in Indonesia. It illustrates how credibility may play an important role in the evolution of the Indonesian monetary policy. Knowing the degree of credibility would be beneficial for Bank Indonesia (BI) in understanding how policy instruments can be adjusted to achieve a long-term inflation target.