ii
Table of Contents
Acknowledgements i Table of Contents
ii Summary
vi List of Tables
vii List
of Figures
viii
Chapter 1: Introduction
1
1.1 Motivation
for the
Study 1
1.2 Organization
of Chapters
6
Chapter 2: Macroeconomic Developments of Indonesian Economy
9
2.1 Overview of the Indonesian Economy: Trends and Developments
9 2.2
The Asian
Financial Crisis
21 2.3
Indonesian Macroeconomic Conditions and Developments Post Asian Financial
Crisis 35 2.4
Fiscal Policy
in Indonesia
39 2.5
The Conduct of Monetary Policy in Indonesia 42
2.5.1 Monetary Policy Before and During the Financial Crisis 44
2.5.2 The Recent Conduct of Monetary Policy 48
2.5.3 Key Macroeconomic Variables in Monetary
Policy 52
iii 2.6
Summary and
Conclusion 59
Chapter 3: Theoretical Foundations of Small Scale Macroeconomic Models
62
3.1 Overview
63 3.2
Why Small Scale Macroeconomic Model? 67
3.3 The
Variants of
SSMM 71 3.3.1 Batini-Haldane
Model BH
72 3.3.2 Small Model of the Australian Macroeconomy
77 3.3.3 Simple Model of the Brazilian Economy
84 3.4
Policy Rules
in SSMMs
89 3.4.1 Simple
Taylor Rules
90 3.4.2 Forward-Looking
Rules 93
Chapter 4: A Small Scale Macroeconomic Model of the Indonesian Economy
96
4.1 The Bank Indonesia Small Quarterly Macromodel BI-SQM
97 4.2
The SSMM for the Indonesian Economy 100
4.3 The Determinants of Inflation in the Indonesian SSMM
108 4.4
Policy Rules for the Indonesian SSMM 111
Chapter 5: Empirical Analysis and Simulation Results 116
5.1 Datasets 117
iv 5.2
Estimation Methods
119 5.2.1 Single
Equation versus
System Methods
119 5.2.2 Estimation
Methods for
Indonesian SSMM
122 5.3
SSMM Estimates
124 5.4
Simulation Methods
and Results
132 5.4.1 Deterministic
versus Stochastic
Simulations 133
5.4.2 Model-Consistent Expectations
134 5.4.3 Solution
Algorithms 137
5.4.4 Baseline Simulation
Results 139
5.5 Scenario
Analysis 144
5.5.1 A Positive Shock in Foreign Income 144
5.5.2 The Role of Credibility in Inflation Targeting 149
5.5.3 Headline or Core Inflation: Which Measure Should Be Used? 152
5.6 Alternative
Monetary Policy
Rules 158
5.6.1 The Settings of Stochastic Simulations 158
5.6.2 A Quest for Best Monetary Policy Response 159
5.6.3 The Policy
Frontier 164
Chapter 6: Summary of Findings and Policy Implications
