Real exchange rate targeting and inflation in Indonesia: theory and empirical evidence

Looking at the period of January 1987 to July 1995, this study shows that the monetary authority in Indonesia had actively intervened the foreign exchange market to ensure the stability of rupiah real exchange rate. Strong evidences of real exchange rate targeting were even more significant during the period of January 1990-February 1993. The study also shows that the real exchange rate targeting policy in Indonesia had been inflationary, particularly during the period of January 1990-July 1995. The last finding supports the results of early studies that showed exchange rate policy which targets a faster rate of depreciation of the domestic currency contributes to a higher inflation rate.