Better communication boosted monetary policy effectiveness in Indonesia

More concise press releases and issuing maturities beyond one month would further improve it, says IMF study

Better monetary policy communication improved the effectiveness of Bank Indonesia’s (BI) policies, says research published by the International Monetary Fund.

However, more concise press releases and deeper financial markets would help to further improve the South-east Asian central bank’s policy-making.

The study researches policy communication’s impacts on financial markets in Indonesia, analysing policy press releases and reports. “Monetary policy transparency has improved over time, in particular in the period leading to the adoption by BI of the inflation targeting framework in 2005, and now ranks among the highest for emerging markets,” say the researchers.

In comparison with peers in the region, the gap between market expectations and actual policy decisions is relatively small in Indonesia. This suggests the policy framework makes monetary policy more predictable.

Nonetheless, “monetary policy communication appears to have weakened, due to long sentences and complex wording structures”, says the study. Additionally, the authors point out the central bank’s measures impact money market rates up to maturities of one month, but have “no significant impact on the bond market and the exchange rate”.

Based on these results, the authors recommend BI makes its press releases “more concise and its language simpler”. Additionally, increasing the issuance of short-term government securities beyond one month would improve monetary policy communication to financial markets, the authors conclude.

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