RESPON KEBIJAKAN MONETER YANG OPTIMAL DI INDONESIA: The State-Contingent Rule?

By developing a long-run macro structural model, the structural Cointegrating Vector Autoregression (VAR), the optimality principle of monetary policy response in Indonesia is formulated. It accommodates not only long-run policy response and short-run dynamic error-correction mechanism, but also specific shocks emerged due to structural changes in the economy. In that context, the generated policy response basically reflects the optimal response of a state-contingent rule, different from common simple policy rules, such as Taylor rule and McCallum rule. This study captures several important aspects related to the implementation of state-contingent rule as an optimal monetary policy in Indonesia, namely: (i) the superiority of interest rate as a policy variable, or an operational target, against monetary base, (ii) the identification of monetary policy lag which is estimated averagely one-and-a half year, and (iii) the sub optimality of central bank monetary policy response, attributed by an over tight or loose policy response.