Small Scale Macroeconomic to Support Implementation of Inflation Targeting in Indonesia

This study aimed to analyze and evaluate the implementation of the inflation targeting policy framework in Indonesia. The data used in this study are quarterly data for the period 1984 to 2008. The simultaneous model approach using two stage least square (TSLS). The results of the analysis concluded that some of the findings: The open economic has adopted in economic system of Indonesia in high openness condition. The implication that is the global economic variables has a substantial multiplier effect to national macroeconomic variables. Good market balance still dominated by consumption and investment. Money market balance is determined by expectations of inflation, interest rates by Bank Indonesia and the lagged demand for money. The output gap also determines the amount of rupiah currencies against special trading partner currencies. Inflation has a strong influence in determining the variations in interest rates the central bank. The high inflation has positive responses by the central bank in determining the amount of interest rates. Inflation in Indonesia is also influenced by world inflation and real exchange rate. Application of the inflation targeting policy in Indonesia has not fully succeeded. Behavior of expected inflation for economic actors tends to backward looking expectation. According the evaluation results, the model used in this research is relevant to use as a forecasting model