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Understanding, Objectives, Instruments, Examples [LENGKAP]

Definition of Monetary Policy

 understanding of monetary policy

In macroeconomics, monetary policy is an effort taken by the government in managing and controlling the amount of money circulating to achieve a better level of economy. Some of the better characteristics of the economy are characterized by the ability to control the price of inflation (inflation) [194599010]increase employment opportunities and improve people's welfare.

The government can reduce, increase or maintain the amount of money in circulation to maintain the stability of the country's economy. When stability is disrupted, monetary policy is used to restore the situation.

In Indonesia, monetary policy has been regulated in Law No. 3 of 2004 which states that the central bank or Bank Indonesia implements monetary policy towards monetary targets, such as the money supply or interest rates in order to maintain the inflation rate.

There are two ways in which the government influences the amount of money in circulation, namely contraction ( mo 19459016 netary contractive policy [expansionary monetary policy] (1945-1912) monetary expensive policy ). Contractive policy or also called tight money policy (1945-1912) tight money policy ) is a policy to reduce the amount of money circulating, such as increasing interest rates, increasing cash reserves and limiting the provision of credit.

Whereas expansionary policies or also called loose money policies apply the opposite, namely increasing the amount of money circulating in ways such as lowering interest rates, reducing cash reserves and freeing up loans .

As for some experts who put forward his opinion on monetary policy, among others, is as follows:

1. Muhammad Natsir

Muhammad Natsir argues that monetary policy is all the actions or efforts of the central bank to influence the development of monetary variables (money supply, interest rates, loan interest rates, and exchange rates) in achieving the expected goals.

the ultimate goal of monetary policy as part of macroeconomics is to help achieve macroeconomic targets, among others: economic growth provision of employment, price stability, and balance of payments balance.

2. Boediono

According to Boediono, monetary policy is the action of the government (central bank) to influence the macro situation implemented. In achieving this goal, the central bank or Monetary Authority seeks to take action, such as regulating the balance between the supply of money and goods so that inflation can be controlled, realizing full employment opportunities and expediting the supply / distribution of goods.

3. Perry Warjiyo

Monetary policy is a policy of the monetary authority or the central bank in the form of controlling monetary quantities (1945-1912] monetary aggregates ) to achieve the development of desired economic activities. In addition, monetary policy is an integral part of macroeconomic policy carried out by considering the cycle of economic activity, the nature of the economy of a country as well as other economic fundamental factors.

4. Muana Nanga

The definition of monetary policy ( monetary polic y) according to Nanga Muana is a policy carried out by the government or monetary authority using a variable money supply (1945912] money supply and interest rates ( interest rates ) in influencing the level of aggregate demand (1945-1912), aggregate demand ) and reducing instability in the economy.

5. Nopirin

According to Nopirin, monetary policy is an action carried out by [1945913] monetary authorities (central banks) to influence outstanding amounts of money and credit which will ultimately affect economic activity society.

6 . Iswardono

Monetary policy according to Iswardono is one part of int egra l of macroeconomic policies aimed at men the achievement of the target [1945965] the target, namely economic growth [1945900] was high, price stability, equitable development and balance sheet balance Payment

Monetary Policy Objectives

 monetary policy objectives

Through the above understanding, it can be seen that the ultimate goal of monetary policy is to create a stable economic condition. Basically, monetary policy that is made is dynamic, which means that policies always change every year based on the country's economic conditions at that time. In addition, monetary policy between one country and another is not the same.

In Indonesia, the central bank or Bank Indonesia is the body responsible for monetary policy formulation. There are 3 main objectives of monetary policy which will be explained as follows

1. Controlling Inflation

In general, the notion of inflation is a economic condition in which price increases occur in a long time. Inflation can occur because the amount of money in circulation is more than the supply of goods and services in the community. Monetary policy is one of the efforts that can be done to control inflation, namely the government can reduce the amount of money circulating in the community …

2. Increasing Job Opportunities

The economy of a country is said to be stable when the amount of money in circulation is balanced with the supply of goods and services. In a stable economy, many entrepreneurs will invest. With the investment, it will indirectly increase new jobs. This will also affect the reduced number of unemployed people.

3. Controlling Currency Exchange Rates

Monetary policy also aims to control the exchange rate of the domestic currency against foreign currencies. For example, the government can determine the amount of the rupiah exchange rate at a certain level so as to reduce excessive exchange rate volatility.

4. Moral Appeal of Economic Actors

In addition to reducing the amount of money circulating through the above method, the monetary policy authority also calls on economic actors, especially banks, to be careful in providing credit to the public. It was intended to control the circulation of money in the community.

Monetary Policy Instruments

 monetary policy instruments

There were five types of instruments used by the government in responding to policy making to deal with the amount of money in circulation. 19659048] 1. Open Market Operation (Open Market Operation)

Open market policy is a policy taken by Bank Indonesia to reduce or increase the amount of money circulating in the community. The method is by selling Bank Indonesia Certificates (SBI) or buying securities contained in the capital market.

When the amount of money circulating in the community is excessive, the government will sell the certificate so that the amount of money in circulation can be minimized. Conversely, when the amount of money circulating in the community decreases, the government will buy securities through the capital market so that the amount of money in circulation will return to stability.

2. Discount Rate

Discount is a policy taken by Bank Indonesia to reduce or increase the amount of money circulating in the community by changing the discount used by commercial banks.

When the government wants to reduce the amount of money in circulation, then the central bank will make a decision to raise interest rates against commercial banks that borrow money. Meanwhile, when the government wants to increase the amount of money in circulation, the central bank will reduce interest rates. That way, the government can control the rate of money in circulation.

3. Cash Ratio Policy

This policy is related to actions taken by the central bank in setting regulations to increase or decrease typical reserves (1945-1917) ratio. When the central bank wants to reduce the money supply, it can increase cash reserves. Conversely, when the central bank wants to increase the amount of money in circulation, it can reduce typical reserves. This was done to be able to control the inflation rate.

4. Strict Credit Policy

Tight credit policies relate to surveillance measures on the amount of money circulating in the community, where the central bank made a decision on the commercial bank which made loans based on 5C conditions, namely Capability Character Collateral Capital and Condition of Economy .

5. Moral Encouragement Policy (Moral Suasion)

The latter instrument has a different way of controlling the amount of money circulating in the community, namely giving circulars, announcements or speeches to commercial banks and other economic actors. The announcement contains an invitation or ban from the government to hold or release loans. That way, the government hopes that economic actors will understand the policies taken.

Examples of Monetary Policy

As for several examples of monetary policy in Indonesia, namely:

  • Bank Indonesia can sell certificates or buy important letters through the capital market.
  • When economic conditions are at a stable level, the central bank makes a decision to reduce interest rates. That way, many people will make loans that are likely to be used for investment in the community. Vice versa, when the economy is at its lowest, the central bank will raise interest rates, which causes many economic actors to choose to save. That way, the amount of money circulating in the community can be reduced.
  • Inflation will reduce economic activity. To overcome this, the authority can sell certificates to reduce the amount of money circulating in the community.
  • The central bank will increase its minimum cash reserves when inflation occurs so that the circulation of the amount of money can be reduced.

monetary policy instruments and examples. Hopefully the above article is useful and can add to your insight in the economic field. Thank you.

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