Economic Journal of Emerging Markets, 9(2) October 2017, Measurement of the efficiency of monetary policy

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1 JM con. J. merg. Mrk. conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 conomc Journl of mergng Mrkes Avlble hp://journl.u.c.d/ndex.php/jep Mesuremen of he effcenc of moner polc k Purwnd, S Hern Rochn * STI STMBI Bndung Busness School, Bndung, Indones. -ml: purwndek@hoo.com Insu Teknolog Bndung, Bndung, Indones. * Correspondng uhor. -ml: s_hr@sppk.b.c.d. Arcle Info Arcle hsor: Receved : 8 M 7 Acceped : Augus 7 Publshed : Ocober 7 Kewords: moner polc, nflon rgeng frmework, loss funcon, effcenc. JL Clssfcon:,, 5 DOI:.885/ejem.vol9.ss.r Absrc Snce, moner polc n Indones sred o use Inflon Trgeng Frmework ITF. To evlue he performnce of he moner polc, requres effcenc ndcors. The mesuremen of he effcenc of moner polc s bsed on nflon nd oupu vrons. Ths pper formules mehod for mesurng he effcenc of moner polc nd pples n Indones. I fnds h snce he mplemenon of ITF, he effcenc of moner polc hs no chnged sgnfcnl. However, he effcenc of moner polc ends o ncrese fer he full mplemenon of he ITF frmework fer 5 hn n he rnson perod of -5. Absrk Sejk hun kebjkn moneer d Indones mul menggunkn Inflon Trgeng Frmework ITF. Unuk mengevlus knerj kebjkn moneer, dperlukn ndkor efsens. Pengukurn efsens kebjkn moneer ddsrkn pd vrs nfls dn oupu. Mklh n merumuskn meode unuk mengukur efsens kebjkn moneer dn menerpknn d Indones. Peneln n menemukn bhw sejk mplemens ITF, efsens kebjkn moneer dk berubh secr sgnfkn. Nmun, efsens kebjkn moneer cenderung menngk seelh mplemens penuh kerngk kerj ITF seelh hun 5 dbndngkn dengn perode rnss -5. Inroducon In he ps few decdes, polc mkers round he world hve become ncresngl wre of he socl nd economc coss due o nflon. conomss nd polcns hve begun o dscuss he coss cused b he hgh nflon snce 96 n whch he world hs been experencng he rsng nflon. Inflon m led o uncern concernng relve prces nd he re of prce ndex n he fuure, so h brngs compnes nd ndvduls become dffcul o mke decson, nd n urn, led o lowers he economc effcenc. conomss clm h nflon m hrm economc growh, especll when he nflon s hgh Mshkn, 7. The wreness of hgh coss due o nflon lnds o he vewpon h low nd sble nflon wll encourge he producv of economc resources nd suppor economc growh, prce sbl becomes n mporn fcor for he long erm helh economc growh. Therefore, prce sbl defned s low nd sble nflon s regrded s he mn gol of he moner polc. In relon o he mers, he cenrl elemen whch s necessr for he moner polc s he use of nomnl nchor o be used s polc sreg. Nomnl nchor s nomnl vrble such s nflon, nd mone suppl h could lm he flucuon of prces n order o cheve prce sbl. There re hree moner polc sreges h re nomnl nchor deermnon nmel moner rgeng, nflon rgeng, nd mplc nomnl nchor. Inflon rgeng hs dvnges compred o he oher sreges becuse s more correled wh he prce flucuon Mshkn, 7. The opml choce of moner polc nsrumen depends on how gh nd rnspren he vlble nsrumens re nd on wheher polcmkers cn comm o fuure polces Akeson, Chr, & Kehoe, 7. Tghness s lws desrble; rnsprenc s onl f polcmkers cnno comm. Ineres res, whch cn be mde endogenousl gh, hve nurl dvnge over mone growh nd exchnge res, whch cnno. As prces, neres nd exchnge res re more rnspren hn mone growh. All else equl, he bes nsrumen s neres res nd he nex-bes, exchnge res.

2 Mesuremen of he effcenc of moner Purwnd nd Rochn 9 Inflon rgeng s chrcerzed b he nnouncemen of offcl rge rnges for he nflon re one or more horzons, nd b explc cknowledgemen h low nd sble nflon s he overrdng gol of moner polc. Oher mporn feures of nflon rgeng nclude ncresed communcon wh he publc bou he plns nd objecves of he moner polc mkers, nd n mn cses, ncresed ccounbl of he cenrl bnk for nng hose objecves Mshkn, 7. The moner polc wh sreg of nflon rge hs been wdel doped b mn counres. New Zelnd ws he frs counr whch mplemened he sreg of he nflon rgeng n 99, followed b Cnd n 99, nglnd n 99, Sweden nd Fnlnd n 99, Ausrl nd Spn n 994, followed b oher counres such s Isrel, Chle, nd Brzl Mshkn, 7. The ITF pproch n he moner polc mplemenon n severl developed counres generll noed success sores. Agur & Smd 5 found h he mplemenon of he ITF cn rse he credbl of he moner uhor. Ther sud ndces he ITF regme s conducve o susnble economc growh nd he nflon rgeng counres recognze more mcroeconomc performnce s s neghbour of no rgeng nd h hese dfferences re generll rbuble o he choce of hs new regme. Ahnsos & Mo 6 found unque feure of her model s h nflon ffecs welfre no onl hrough he rdonl chnnel,.e., hrough deermnng equlbrum rel blnces, bu lso hrough nfluencng gens' enr decsons n he fnncl mrke. The use her frmework o sud he effec of nflon on welfre, sse prces, nd OTC over he couner rde volume. In conrs o mos moner models predc negve relonshp beween nflon nd welfre. The found h nflon cn be welfre mprovng whn cern rnge, becuse mges serch exernl h gens mpose on one noher when he mke her OTC mrke enr decson. There s no unversl relonshp beween he conduc of moner polc nd he performnce of he cpl mrke Mrnescu, Ion-Iuln, & Horobe, 5. In USA for exmple, we hve srong response of he cpl mrke o he rules moner polc componen bu we do no see he sme behvor for oher counres. Ths neresng fc cn onl be explned b he dscreonr ndcor, showng h f moner polc decsons rel more on dscreon, he sock mrke response becomes ncresngl errc nd cn cuse rronl responses. Cores & Pv, 7 rgued h long-erm effor of credbl consrucon n Brzl dng bck o he 99s suffered sebck n, when he Bord of Governors of he Cenrl Bnk of Brzl BCB ws chnged he onse of he Rousseff governmen. The found prelmnr evdence h he looser moner polc under Rousseff s frs erm hs conrbued o deeroron of nflon expecons nd dnmcs, whch hve become more sensve o nflonr shocks. Source: Bnk Indones Fgure. The re of nflon n he perod -5 In Indones, he moner polc wh he nomnl nchor begn o be mplemened long wh he mplemenon of Ac er 999 concernng Bnk of Indones. In he legslon, s sed h he sk of Bnk Indones s focused on keepng he ruph vlue sble. In he mplemenon, Bnk In-

3 4 conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 dones s oblged o deermne he nflon rgeed. Therefore, he moner polc oulned n he Ac hs mplcl deeced h he moner polc of menwhle, n he explnon of Ac number er 999. I s sed h he sbl of ruph nd s resonble exchnge re s pr of prerequses for chevng susnble economc growh whch n urn wll mprove he people s welfre. Snce he use of BI re for chevng he nflon rge, nflon remn hgh nd flucung. Fgure shows h, here were of les fve pons of clmx nflon nd fve pons of n-clmx nflon n perod of o 5. Durng he perod, he lowes nflon ws he re of.4%, n November 9, whle he hghes nflon ws he re of 8.8%, n November 5. The consderble dfference beween he hghes nd he lowes nflon res show h he nflon flucuon n Indones s sll hgh. The nflon re hs sll been hgh nd flucung snce he mplemenon of he moner polc wh he nflon rgeng sreg should be pd enon o, consderng h he purpose of he mplemenon of he polc s o mee he low nd sble nflon re. A frl lrge nflon flucuon n Indones requres mehod of evluon o mesure he ccurc of he mehod n chevng he rgeed nflon. The ndcors of he success of he moner polc whn he frmework of he ITF re usull mesured b counng effcenc. The effcenc moner polc vews he ccurc of he polc n chevng he nflon rge. The ccurc s seen hrough how bg he nflon devon occurrng from he nflon rgeed. On he oher hnd, nflon hs rde-off relonshp wh he oupu, where he oupu s lso he gol of economc developmen. Therefore, n mesurng he effcenc of he moner polc, n ddon o nflon vron, he oupu vron s lso clculed. Therefore, he effcenc of he moner polc s usull clculed from he oupu vron nd he nflon vron. Reserch Mehod There re severl mehods for clculng he effcenc of he moner polc offered b economss. Ths pper develops mehod for mesurng he effcenc polc bsed on formul h hs been prevousl esblshed. I hen uses he echnque o mesure effcenc of he moner polc n Indones. The purpose of he moner polc n he ITF Frmework s o cheve he nflon re rgeed. The success of he moner polc s ndced b s cpbl n mnnng sble nflon, clled effcenc. On he oher hnd, nflon hs rde off relonshp wh he oupu. Bscll he model of effcenc mesuremen ws mde b clculng gp beween opmum loss funcon. Th s mnmum oupu nd nflon vron wh he cul condon of he nflon vron nd oupu vron. Severl mehods of effcenc mesuremen hve been mde b economss such s Cecche, Flores-Lgunes, & Kruse 6 nd Brec, Gbllon, Lsselle, & Rsmbnern. In he mehods of Cecche e l. 6, effcenc mesuremen of he moner polc s done n wo phses. Frs, he denfcon of he mnmum loss funcons. The mnmum loss funcon s formed from he deermnon of opmum neres re. Furher, we need denf oupu nd nflon vron. The gp beween mnmum loss funcon nd cul condon ndces he degree of he effcenc of moner polc. The smller gp beween he opml nd he cul moner polc, he more effcen he moner polc. Brec e l. developed mehod for mesurng he effcenc bsed on he heor of producon Frrell 957. In he cse of consn reurns o scle echnolog, hs dsnce funcon llows o fnd more effcen w of producng he sme level of oupu gven h n he new llocon he npus re emploed n he sme ro s n he orgnl bu neffcen llocon. Ths ro s ofen clled he mesure of echncl effcenc. Furhermore Brec e l. developed mehod for mesurng he effcenc bsed Mlmqus ndex. In producon heor, he Mlmqus ndex s blerl ndex whch compres he producon echnolog of wo economes, nmel he echncl chnge nd he effcenc chnge. In he Cecche s frmework, he Mlmqus ndex s defned from he Frrell mesures evlung he oupu nflon vrbl froner. I deermnes he shf of hs froner nd he chnges n mcroeconomc performnce. The use of he Mlmqus ndex llows o sepre he effecs of he polc-mker nd he chnges n he srucure of he econom. Brec e l. menoned h he globl effcenc chnges cn be rewren s he produc of he chnges n mcroeconomc performnce, mnmum qudrc loss, nd effcenc froner. The Mlmqus ndex cn denf he conrbuons of mprovemens n he effcenc of moner polc nd chnges n he vrbl of ggrege suppl shocks.

4 Mesuremen of he effcenc of moner Purwnd nd Rochn 4 Opml neres re The effcenc moner polc s clculed b consderng he nflon vron nd he opml oupu vron. Opml oupu nd nflon vron occurrng n he neres re resuls n he mnmum los funcon. Rudebusch & Svensson 999 sed h he opml moner polc ws gven b he equon of oupu nd nflon s follows. u From he equon nflon expecon m be mde no equon: nd nsered no he oupu equon, s bsned: u u If: so oupu nd nflon of perod + s: u 4 v 5 where u v The vlue funcon from he loss funcon s: mn V L 6 Mnmzon of los funcon wh equon obscle 4 nd 5 s: mn v V v u L 7 The frs order condon s V 8 From he envelope heorem, s obned: V L 9 B mulplng he equon 8 b, nd beng dded o he equon 9, so resuls n: V. B whdrw he me one perod nd mkng expecon, V cn be elmned from he equon 8 becomng: or: Opml condon occurs n B. Opml B vlue s: B B Consderng, hs opml moner polc s:

5 4 conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 B ffcen moner polc ffcen moner polc s polc h mnmzes loss s sde effec he mplemenon of moner polc. Moner polc effcenc m be seen b comprng he cul moner polc wh he moner polc effcenc froner. The moner polc effcenc froner s reduced from he mnmzon of loss funcon for dscreon moner polc. Loss funcon conns oupu nd nflon vron lke he equon 4. Whle s level of olernce of he moner polc mker, owrds he oupu gp vron for keepng sble nflon. In oher words, m be requred s preference level of moner polcmkers owrds he oupu gp vron. Severl economss gve he opml vlue of whch s.5 or. Wlsh,. L ˆ 4 The resul of equon mnmzon 4 wh mn combnons of oupu nd nflon vr - on dd cern level of wll from rde off lne beween oupu nd nflon vron s shown n Fgure. The smller s he closer he rde off lne o he pon of orgn pon. The moner polc effcenc froner for dscreon polc s ngen he rde off lne of oupu nd nflon vron. Cecche e l. 6 clculed chnge of he moner polc effcenc n n lmos smlr w. Cecche focused on he chnge of he moner polc effcenc hrough grphc mehod nd mhemc clculon of loss funcon s funcon of oupu nd nflon vron b weghed he preference of nd. The loss funcon cn be wren s follows: Loss Vr Vr, where: λ = prmeer of cenrl bnk preference owrds nflon vron Vr = nflon devon squred from s rge or oupu devon from poenl oupu π = nflon = oupu 5 Orgnl froner Shfed froner Vrnce of oupu Oponl Vrnce [vr *,vr * ] Performnce Pon [vr,vr] Orgnl froner Vrnce of nflon Fgure 4. Moner polc effcenc froner orgnl froner nd performnce pon Bsed on he loss funcon formed, he mesuremen of he mcroeconomc performnce cn be formuled he perod of P gven b he equon: P Vr Vr 6

6 Mesuremen of he effcenc of moner Purwnd nd Rochn 4 The opml mcro-economc performnce S s he economc performnce resulng from he mnmum P, wh S : * * S Vr Vr 7 Where, vrπ * nd vr * re nflon vrnce nd oupu vrnce n he opml condon. If S = S S hs negve vlue, ndces h he performnce of econom decreses. To deermne vr π * nd vr *, we cn see homohec shf of he orgnl froner curve ouwrd ngen he performnce pon s shown n Fgure 4. The opml vrnce s he nersecon pon beween orgnl froner nd he lne drwn from he orgnl pon o he performnce pon. The effcenc of he moner polc s clculed from he dsnce of he cul performnce owrd he opml performnce. The neffcenc level for ever perod s: [Vr Vr ] [Vr Vr ] 8 Then, he vrble of moner polc effcenc s clculed, bsed on he proporon owrd P h s: Q P Furhermore, he verge neffcenc beween wo perods wll be clculed b ssumed h cenrl bnk chooses he neres re mnmzng he loss funcon h s mnmzng devon squred from he nflon nd oupu of he verge rge. The verge s formuled s follows: 9 L [ * ] Where π * nd * re he nflon rge nd he oupu rge for ever ken from he verge vlue, nd s he nflon level for ever ken from he verge vlue. Mesuremen for effcenc of moner polc Moner polc s consdered o be effcen f he polc generes low flucuon of oupu nd nflon. Low nd sble nflon wll encourge he oupu growh n he long erm. Hgh flucuon of nflon wll cuse socl loss, n whch model s clled loss funcon. The equon of loss funcon s defned s follows: LF = nflon vrnce + - oupu vrnce. The smbol vlued beween nd, s level of olernce of BI owrd he nflon flucuon, whle he level of olernce of BI owrd he oupu flucuon s -. Theorecll, oupu nd nflon vron me s clculed owrd he rge vlue nd s poenl vlue. ffcenc s mesuremen for opml polc n lmng he oupu growh n order h nflon s no oo hgh for he purpose of oupu growh sbl. Opml polc s mcroeconomc polc resulng n mnml loss funcon. The los funcon used n hs reserch s: Loss Vr Vr, where <λ<. Vr * show devon squred owrd s rge h s vr π = π π * nd vr = *, where π nd re nflon nd oupu. The nflon vrbl verson for developng counres uses λ =, Cecche e l. 6. Afer s deermned, effcenc nlss cn be connued. In hs reserch, hs effcenc h wll be mesured s he effcenc vrble beween wo perods. The frs perod s he perod before pure ITF s used or FFIT Full Fledged Inflon Trgeng n I up o 5 II. The second perod ws he perod sure ITF ws mplemened or FFIT n whch onl one nomnl nchor hd bed used h s he nflon occurred n 5 III up o 8 IV. Sges of nlss re s follows:. In ech perod, deermne he les loss funcon vlue from he cul d n Indones b usng =. n ll qurer n he reled perod.. Formng orgnl froner. The curve ws derved b chngng he vlue of wh he mnml loss funcon vlue derved he sge. Some pr combnons of vrπ nd vr re derved s resul of vlue of. Plong vrπ n vercl xs nd nd vrn horzonl xs wll from curve of ndfference or curve of effcenc froner, n whch sge s clled he curve of orgnl froner Ths curve hs socl MRS = /-. To mprove he formon of he curve of effcenc froner o be seeper, m be done b smple regresson of vr owrd /vrπ s follows:

7 44 conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 Vr Vr If β sgnfcn β s no sgnfcn, he curve orgnl froner cn be formed fromvr Vr.. In ech perod vrπ * nd vr * re grphcll sercher for. The vron s obned from he ngenc pon beween he lnes drwn from he orgnl pon o he performnce pon s shown n Fgure Clculng P nd S P Vr Vr S Vr * Vr * Where P s economc performnce nd S s nflon nd oupu vron n he opml condon. P nd S s clculed once ech for ever perod of b kng he verge of π nd verge n ech perod. 5. Clculng nd s dfference of P nd S re = P S or cn be clculed b formul s follows: [Vr Vr ] [Vr Vr ] Then s clculed: The vlue of posve Δ ndces n ncrese or gn of moner polc effcenc. 6. Clculng Q Q P The posve vlue of ΔP ndces n ncrese or gn n mcro-economc performnce performnce gn. Vlue of Q ndces he effcenc vrble of he moner polc. The vlue of posve Q ndces h he moner polc s geng more effcen. If vr π ndces nflon vrble or vr ndces oupu vrble, correlng beween perods nd s sscll sgnfcn, he opml polc s mplemened n condon ˆ Wlsh,. Ths reserch kes.. Resuls nd Dscusson Mesuremen of he effcenc of moner polc In hs pr, he effcenc of moner polc wll be clculed n he frs nd he second perod. The frs perod s he perod before ITF ws full used or FFIT Full Fledged Inflon Trgeng n o 5 II. The second perod ws he perod fer ITF ws full mplemened or FFIT where onl one nomnl nchor hd been used, h s he nflon occurrng n 5 III o 9 III. The sges of nlss re s follows: Deermnng he les loss funcon The vlue of for clculng loss funcon s deermned hrough severl mehods.e.: deermned b cenrl bnk, choosng he vlue of recommended, or clculed. Accordng o he mehod of Cecche e l. 6 h counr wh hgh nflon cn be uses he vlue of =.; nd =.8 for developed counres The counres wh low nflon. In Indones he qurerl nflon durng, he reserch perod ws percen on he verge, hs re ws consdered hgh. Therefore, n hs model of effcenc he vlue of =. s ppled. Wh beng menoned, he vlue of loss funcon ws chosen from he cul d n Indones n he whole qurer for ech of he frs nd he second perod. In he frs perod, he mnmum loss funcon vlue ws.49 occurrng n 5 II nd he loss funcon n he second perod ws.9 occurrng n 7 II.

8 Mesuremen of he effcenc of moner Purwnd nd Rochn 45 Formng he orgnl froner curve The curve of orgnl froner s derved b chnge he vlue of wh he mnml loss funcon obned from he frs sge. Severl pr combnons of vrπ nd vr re derved s resul of vlue. Plong vrπ n vercl xs nd nd vr n horzonl xs wll from curve of ndfference or curve of effcenc froner, n hs sge s clled he curve of orgnl froner. There re wo curves of effcenc froner h re for he frs nd he second perod. Vr = *.6 Opml pon n he frs perod.77 ;.66 Orgnl froner curve orgnl froner =,5 Vr = - * Fgure 5. Orgnl froner curve of he frs perod Annoon: orgnl froner curve bove ws he mnml loss funcon curve n 5 II. Ths curve ws derved b shfng he vlue of n he fxed loss funcon vlue h s he mnml loss funcon. The orgnl froner curve s smmercl o he orgn. The curve of orgnl froner cn be seen n Fgure 5. To mprove he formon of he orgnl froner curve o be more ccure, m be done b smple regresson of vr owrds /vr s follows: Vr Vr Vr,4, Vr Ths regresson equon s requred o seek vrπ * nd vr * n he hrd sge followed b he formon process of orgnl froner for he second perod. Fgure 6 provdes of prs of vr nd vr n he mnml loss funcon of he second perod s npu o mke he orgnl froner n hs perod. Lke he frs perod, n =.5 he vlue of olernce of oupu nd nflon n he equon of loss funcon hd he sme srengh, he vlue of vr ws he sme s he vlue of vrπ. Ths shows h he orgnl froner curve s smmercl o he orgn. The orgnl froner cn be seen n Fgure 6. To mprove he formon of he orgnl froner curve o be more ccure, smple regresson of vr owrd /vrπ cn be done s follows: Vr ; Vr,,9 Vr Vr Ths regresson equon s requred o seek vr * nd vr * n he hrd sge.

9 46 conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 Vr = *.47 Opml pon n he second perod.69 ;.47 Orgnl froner curve =,5 Vr = -* Serchng opml vrnce Fgure 6. Orgnl froner curve of he second perod Opml vrnce s smbolzed b vrπ * nd vr *, h s nersecon pon beween lnes drwn b orgn pon o he performnce pon. Performnce pon s he verge vrπ * nd * n ech perod. In he frs perod, he verge vrπ * =.7 nd verge vr * = 6., whle n he second perod, vrπ * = 5. nd he verge vr * =.6. The vlue of vrπ * nd vr *, ccordng o Cecche e l. 6, could be done grphcll; bu n hs reserch, seekng vrπ * nd vr * ws done mhemcll. Ths mhemc w s done n order o ge more ccure resul. Vrns P Averge of loss funcon of he Frs Perod S S P Averge of loss funcon of he Second Perod Orgnl Froner of he Second Perod Orgnl Froner of he Frs Perod Vrns Fgure 7. Orgnl froner nd loss funcon curve of he frs nd he second perod Fgure 7 s seen h he performnce pon P s hgher compred wh P. Ths mens h here s n ncrese n he mcroeconomc performnce of Indones from he frs perod o he second perod.

10 Mesuremen of he effcenc of moner Purwnd nd Rochn 47 In he fgure menoned bove s lso shown h s bgger hn ndcng h he effcenc of moner polc s ncresng. From he frs perod o he second perod. Comprng P wh P or wh cn onl be done wh he condon of consn, f of he frs perod s dfference from he seconds perod, P nd cnno be compred wh P nd. In hs reserch he vlue of menoned bove s. boh n he frs nd n he second perod. The decrese n he vlue of P compred wh P ndces h he mcroeconomc performnce ncreses due o he ITF mplemenon h s he nflon deermnon s rge of moner polc. Fgure 7 shows h he lne drwn from he orgn o he performnce pon roes o he rgh. Ths ndces h he BI preference owrd nflon n full mplemenon of ITF s relvel decresng s compred wh he mplemenon of rnsonl ITF. In perod of full mplemenon of ITF, he verge nflon flucuon beween qurers s bgger s compred wh he perod n he mplemenon of rnsonl ITF, bu s oupu flucuon s smller s compred wh he rnsonl perod. Overll, socl loss funcon n he perod of full pplcon of ITF s smller compred wh he prevous perod. The ncrese n nflon flucuon nd he decrese n oupu flucuon n he full pplcon of ITF fer Jul 5 cn be undersood becuse he mplemenon of nflon rge does no men o gnore he oupu nd s sbl, here s sll spce of flexbl n he mplemenon of ITF lke grdul progrm on dsnflon nd flexble operonl desgn. The mplemenon of ITF n Indones follows he bsc prncples h ITF s frmework, no rule. The mplemenon of he moner polc lso consders wder developmen rge mong oher hngs s economc growh. Unlke he prncple of full dscreonr, ITF requre h dscreonr polc n he mplemenon of he moner polc s resrced. Afer neffcenc of moner polc s known hen s clculed o know he effcenc vrble Q: =,886,4 =,645. The moun of s scle no vecor. The posve vlue of Δ ndces n ncrese n he effcenc of moner polc. Clculng he effcenc vrble Q The chnge of effcenc s he ro of chnge n effcenc o performnce gn, h s: Q P,645 Q,947,68 The vlue of Q ndces he effcenc of moner polc. The vlue of Q n hs reserch s,947 posve, hs ndces h moner polc s geng more effcen. The resul of hs effcenc nlss ndces h he effcenc of perod wo fer ITF s full mplemened s hgher hn he effcenc of perod one before ITF s full mplemened. B usng nflon rge sreg, oupu nd nflon flucuon become smll ndcng h oupu nd nflon re relvel low nd sble snce ITF full mplemened. Wh he nflon rge beng deermned b BI, nflon expecon wll ge close o or he sme s he nflon rge of Bnk of Indones b +, or pples o + = +. So bs beween publc nflon expecon nd nflon rge s geng smll or zero, whch n urn, wll decrese he nflon flucuon. Furhermore, he decrese n nflon flucuon encourges he decrese n gp beween cul oupu nd poenl oupu oupu n full emplomen. Therefore, moner polc becomes more effcen. On he oher hnd, he decrese n nflon flucuon wll mke socl less funcon smller. Ths relonshp s llusred n model of Mone n he Ul Funcon M UF, where nflon relonshp wh loss funcon s posve Wlsh,. The hgher he nflon flucuon s he bgger he socl loss funcon. On he conrr, he lower he nflon leds he smller he socl loss. The resul of he nlss of moner polc effcenc ndces h he effcenc s geng bgger whch mens h he socl loss s geng smller. In Indones, he moner polc wh ITF sreg hs been ppled snce. Ths polc hs onl one, sngle rge h s nflon. Ths s dfferen from he polc whch ws ppled before h s moner rgeng whch hd mulple rge.

11 48 conomc Journl of mergng Mrkes, 9 Ocober 7, 8-49 However, n he begnnng of he pplcon of ITF polc, bnkng condon n Indones ws no e compleel sble so h he nflon rge sreg hd no worked ou well. Observon on rnsmsson mechnsm ws no n es job. Whle n he ITF mplemenon, he runnng of hs rnsmsson mechnsm pled n mporn role consderng he mnde gven o cheve he sbl of prces. In he condon lke hs, he ncrese n he neres re of moner nsrumen SBI o bsorb crel mone o go bck o he bnkng ssem ws fer le due o he response of depos neres re so o encourge he ncomng of crel mone o bnkng ssem requred of he ncrese n he neres re whch ws hgher hn should hve been. Never he less, he obscle menoned ws no specfc obscle for he pplcon of nflon rge frmework, becuse bscll, moner polc wh n frmework becuse bscll, moner polc wh nd frmework requres he presence of helh fnncl ssem so h he rge chevemen becomes credble. A mure prepron s requred so mer n pplng he nflon rge frmework, BJ cn ncrese nflon predcon ccurc nd undersndng of he moner polc rnsmsson n Indones. Ths prepron s requred for he pplcon of full nflon rge frmework. The ITF pproch hs dvnges compred wh he moner rgeng pproch. Wh ITF, he moner polc m focused beer on domesc ssues nd respond mmedel ever shock occurrng n domesc econom. Sbl of relons beween moner ggreges nd nflon s no ver mporn ssue s he success of polc does no depend on he relon menoned bove. The ITF pproch enbles moner uhor o use ll he nformon vlble n deermnng he polc drecon h wll be ken. In ddon, wh ITF he publc m undersnd esl he polc drecon h hs been ken due o he presence of rnsprenc of he polc kng process nd he ncrese n cenrl bnk ccounbl wh regrd o he explc nflon rge nnouncemen o he publc. The ITF pproch m lso vod he possbl of cenrl bnk o be rpped under polc pressure. Cenrl bnk m crr ou he moner polc ndependenl. In Indones, he full-fledged mplemenon of ITF b levng moner rgeng n prcce hd jus begun snce he mddle 5. The observon on emprcl d n Indones ndced h he nflon flucuon nd he oupu flucuon were relvel smll snce he full-fledged pplcon of ITF Romer, 6. From he resul of hs reserch he moner polc effcenc n Indones on he full-fledged pplcon of ITF ws hgher hn he moner polc effcenc before he full-fledged pplcon of ITF ws used. Unforunel he ncrese n he effcenc ws no sgnfcn. Ths mens h longer perod s requred n order h s shfng from he moner rgeng o ITF cn run well. The me pssed ws oo shor o evlue sgnfcnl wheher or no he polc mplemenon ken ws successful. The performnce of Bnk Indones o mnmze he nflon nd oupu flucuon ws relvel successful. The credbl of Bnk Indones n conrollng he nflon hs begun o ge beer nd he nflon ends o declne. The full-fledged mplemenon of ITF wll srenghen publc expecon owrd he nflon decrese nd speed he dsnflon progrm beng crred ou. Ths n urn, wll ncrese he credbl of Bnk Indones n conrollng he nflon. In ddon, he nflon rge connng he elemen of good governnce for modern cenrl bnk lkes gol clr; he rnsprenc nd ccounbl re prllel n he effor of Bnk Indones o ncrese he credbl n he mplemenon of ITF. Conssence nd more focus re png close enon o he nflon re expeced o encourge he oupu growh n long erm. Concluson The effcenc of moner polc cn be mesured b clculng he dsnce of performnce pon o he orgnl froner curve. Performnce pon s he verge vrnce of nflon nd he verge vrnce of he oupu gp, whle he orgnl froner curve s curve obned b vrng he λ he mnmum loss funcon, where he vlue of λ s he degree of olernce of Bnk Indones o he nflon flucuons. Ths effcenc mesuremen mehod ws ppled o he d of Indones durng he rnsonl ITF mplemenon perod -5 nd full mplemenon perod 5-9. Snce he moner polc ws full mplemened wh he ITF on Jul 5, here hs been endenc h he moner polc effcenc ncresed s compred wh he ITF pplcon n he rnsonl perod n o 5. The moner polc wh full-fledged ITF pplcon resuled n lower coss nflon flucuon nd oupu flucuon. Ths s due o he fc h he ITF polc s se frmework, srng from he nsrumen, rges o he polc gol.

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