Recommendation for Indonesian Economy

Question: Discuss about the Recommendation for Indonesian Economy. Answer: Introduction: There are various ways of arresting the inflation going on in Indonesia. The main reason for the inflation is a rise in oil price in the country. This results in cost push inflation. Events like Ramadan increases the demand for the products in the country causing demand-pull inflation. Contractionary monetary policy: The government of Indonesia can reduce inflation by taking contractionary monetary policy. The financial institutions in the country, which deals with the public directly, will get less amount of money for the lending purpose. The reduction in the money supply of the country will leave the citizen with less amount of money in hand to spend. This will arrest the spending spree of the citizen and the price level for the available goods will decrease. Increase reserve requirements: Increasing the reserve requirements will reduce the amount of money that the banks can hold for lending purposes. These banks will have to keep on hand more money for covering withdraws. With less money being lent, people will have less money to spend. It will reduce the demand for the goods available in the economy. This will, in turn, ease the inflation situation in Indonesia. This will also decrease the private investment in the country. As a result, people will have less money to spend again because the production faces a halt. The Bank Indonesia will advise how much the reserve requirements will be. Direct or indirect reduction of money supply: The Bank Sentral Republik Indonesia or the Bank Indonesia can increase the interest rates through the Federal Reserve. The banks operating in Indonesia have to give an increased interest rate in order to borrow money from the government. Here, the banks will have to lend to the public at a higher interest rate to make a profit. This will increase the interest rate faced by the citizen as a result. The increased rate of interest will reduce individual borrowing. People will demand less and spend less on goods and services in the country. This will also decrease the total domestic investment in the economy. It will cause fall in income level. With less income level expenditure on products will decrease, and the inflation rate will fall. Supply side policy: The government of Indonesia can increase the long-term competitiveness which will, in turn, increase the productivity in the country. The competitiveness of the organizations operating in the Indonesian market will bring in more ways to reduce the cost of production and decrease the prices. This will reduce inflation in the country. This policy will be applicable for long-run scenario only, as it will take the time to discover the cost-reducing technologies. The hike in oil prices will ease in the long run as well, making the transition period smooth. This will ensure a price level which will be positive for growth. Fiscal policy: The government of Indonesia can increase the tax level in order to reduce liquid money in the market. With less money in hand people will demand less and spend less on goods and products. The government of Indonesia can also decrease the spending on the economy. This will reduce the production and decrease money income in the long run. The effect will be the same as above. The government of Indonesia can also increase the subsidies on oil prices. This will reduce the overall prices in the market which had risen due to higher oil price. As a result, the rate of inflation will go down in the short run. Exchange rate policy: The government of Indonesia can increase the exchange rate to make Indonesian currency stronger than those countries from where Indonesia imports goods, services, and oil. This will reduce the price for import. The reduction in prices of goods and services of import will ensure a reduction in the domestic prices. The inflation due to the availability of goods and services will go down. As the oil price will go down, the overall price for domestic goods will also decrease. This will ensure a fall in the inflation rate. Wage control: The government of Indonesia can reduce the wages of government employees directly. A tax can be implemented on those people working in the private sector to reduce their real income. This will result in less liquid money in the hands of the citizen. With less money, spending in the economy of Indonesia will go down. This will ensure a decrease in the inflation rate of the country. The wages of the citizen of Indonesia facing a downturn will also have a negative effect on the oil prices; the oil consumption will fall. This will, in turn, reduce the overall prices of goods and commodities. References: Alpanda, Sami, and Adam Honig. 'The Impact of Central Bank Independence on the Performance of Inflation Targeting Regimes', Journal of International Money and Finance, vol. 44/(2014), pp. 118-135. Bagus, Philipp, David Howden, and Amadeus Gabriel. 'Causes and Consequences of Inflation', Business and Society Review, vol. 119/no. 4, (2014), pp. 497-517. Geronikolaou, George, Eleftherios Spyromitros, and Panagiotis Tsintzos. 'Inflation Persistence: The Path of Labor Market Structural Reforms', Economic Modelling, vol. 58/(2016), pp. 317-322. Ginindza, Mzwandile, and Esfandiar Maasoumi. 'Evaluating Inflation Targeting Based on the Distribution of Inflation and Inflation Volatility', North American Journal of Economics and Finance, vol. 26/(2013), pp. 497-518. 'Indonesia Annual Inflation Eases to 3.6 Pct in April', Xinhua News Agency,2016. 'Indonesia: Indonesia Inflation Eases to 7.75% in February', Asia News Monitor,2014. Kapetanios, George, Massimiliano Marcellino, and Fotis Papailias. 'Forecasting Inflation and GDP Growth using Heuristic Optimisation of Information Criteria and Variable Reduction Methods', Computational Statistics and Data Analysis, vol. 100/(2016;2015;), pp. 369-382. Mariyanti, Tatik, and Akhmad Affandi Mahfudz. 'Dynamic Circular Causation Model in Poverty Alleviation: Empirical Evidence from Indonesia', Humanomics, vol. 32/no. 3, (2016), pp. 275. Moessner, Richhild. 'Reactions of Real Yields and Inflation Expectations to Forward Guidance in the United States', Applied Economics, (2015), pp. 1-12. Moore, Bartholomew. 'Monetary Policy Regimes and Inflation in the New-Keynesian Model', Journal of Macroeconomics, vol. 40/(2014), pp. 323-337. Sepahvand, Mehdi. 'Liquidity Growth Control Main Factor Behind Inflation Reduction in Iran- MP', Trend Capital. English,2015. Taguchi, Hiroyuki, and Woong?Ki Sohn. 'Inflation Targeting and the Pass?through Rate in East Asian Economies', Asian Economic Journal, vol. 28/no. 2, (2014), pp. 139-159