Yanuar Dananjaya, Bsc.

, MM

How to conduct monetary policy

Conduct of Monetary Policy

Responsibility of central bank governor of central

bank
Sallary of Bi governor: Rp 194mill/month. CEO
pertamina, Mandiri, BRI +/- 180mill. Gaji presiden +/65mill
Essence of monetary policy: decide and implement
interest rate
Need to induce banks to follow BI rate by
manipulating JIBOR (Jakarta Interbank Offered Rate)
to be same as BI rate

Yanuar Dananjaya, Bsc., MM

How to conduct monetary policy (cont)

Conduct of Monetary Policy

JIBOR due to requirements of banks to do clearing

every end of day
Clearing: settlement of all transactions between
banks
Can be surplus or deficit create need to save
money or borrow money. Need save and short term
(1 to few days)
Create fund market among banks, JIBOR is the
rate, based on supply and demand
JIBOR influence bank deposit and credit rate
Central bank manipulate JIBOR to make it same
as central bank interest rate control bank deposit
and credit rate

Yanuar Dananjaya, Bsc., MM

How to conduct monetary policy (cont)

Conduct of Monetary Policy

CB manipulate JIBOR by influencing supply and

demand
Through 3 instruments:
Open market operation buy and sell securities
(SBI, SUN) to banks
Change Reserve Requirement Ratio (Giro Wajib
Minimum) percentage of deposit (Dana Pihak
Ketiga) that need to be deposited by banks to
central bank. In Indonesia currently 8%
Change the rate of Central Bank Discount Loans
Loans offered by CB to banks as Lender of the
Last Resort. Rate higher than CB rate

Yanuar Dananjaya, Bsc., MM

Open Market Operation

Conduct of Monetary Policy

CB manipulate JIBOR by influencing supply and

demand
Through 3 instruments:
Open market operation buy and sell securities
(SBI, SUN) to banks
Change Reserve Requirement Ratio (Giro Wajib
Minimum) percentage of deposit (Dana Pihak
Ketiga) that need to be deposited by banks to
central bank. In Indonesia currently 8%
Change the rate of Central Bank Discount Loans
Loans offered by CB to banks as Lender of the
Last Resort. Rate higher than CB rate

Yanuar Dananjaya, Bsc., MM

Supply and Demand in Jibor market

Conduct of Monetary Policy

see page 180

Demand slope is normal the less the interest,
more demand on fund
Supply is perfectly inelastic (not affected by interest
rate) due to determined by surplus of fund. Limited by
rate of CB discount loans JIBOR cannot be higher
as banks will borrow from CB instead
Both supply and demand can move left and right

Yanuar Dananjaya, Bsc., MM

Effect of Open market operation

Conduct of Monetary Policy

See p 181
Affecting supply of fund by putting or taking money
from JIBOR market
Selling gov bond takes money from JIBOR market
supply curve moves left
Buying gov bond puts money to JIBOR market
supply curve moves right
JIBOR rate cannot higher than CB discount rate

Yanuar Dananjaya, Bsc., MM

Effect of change discount loan rate

See p 182

Conduct of Monetary Policy

Reduce or increase the cap of JIBOR

Only have effect if reduce lower than current JIBOR

Yanuar Dananjaya, Bsc., MM

Effect of change reserve requirement

Conduct of Monetary Policy

See page 183

Affecting demand by increasing or lowering banks
need of money
Higher Reserve Requirement makes bank need more
money to put in CB increase demand, demand
curve moves right
Lower Reserve Requirement makes bank need less
money to put in CB reduce demand, demand curve
moves left

Yanuar Dananjaya, Bsc., MM

Open Market Operation

Conduct of Monetary Policy

Dynamic operation to achieve the intended JIBOR

rate
Defensive operation to maintain the already
appropriate JIBOR rate
Done almost daily
The most common instrument employed by CB
Advantage compared to change RR and Discount
loan:
Complete control on Volume of money
For both small and big effect
Can be reversed easily w/o affecting credibility
Can be implemented very quickly