Analysis and Management of Indonesian Money Supply Growth

This paper reviews Indonesia's record of monetary management over the last quarter century, showing that there has been a lack of stability in money growth, and that average growth rates have been higher than is consistent with low inflation. The source of monetary expansion is located primarily in growth of base money, which is here disaggregated into three components reflecting government policy in respect of the budget, the exchange rate, and interest rates, respectively. Exchange rate policy, through its effect on the balance of payments, is shown to have been the main cause of rapid and unstable monetary growth during this period. A contrast is also drawn between the author's preferred technique of analysing monetary movements and the 'accounting approach', based on money formation tables and favoured by previous writers in this field.