Pursuing Inflation Targeting Policy Framework in the Midst of Inflationary Pressures and Fiscal Constraint in Indonesia

Pushing for a higher and a more robust growth while maintaining price stability within a target range of inflation continue to be core tasks for the macroeconomic policy management in Indonesia in recent years. Whilst inflation was successfully kept below the target of 7 percent at the end of 2007, the monthly year on year inflation has already gone above 10 percent by May 2008 and is expected to reach 11 percent by end of 2008. Fiscal policy continues to be relatively marginalized and lacks of stimulus, with a significant share of the current expenditure of the 2008 budget has to be allocated to finance subsidy and debt service. Our study investigates the commitment of the country to its inflation targeting (IT) policy in the midst of fiscal constraint and the urgent need to push for higher growth rate. It examines preliminary outcomes of the IT policy and highlights dilemmas and potential policy trade-offs.