We have acknowledged very well that there are three goals of Central Banks, especially our Bank Indonesia (BI), as monetary authority: Price Stability, Exchange Rate Stability and Banking Surveillance. These are our so-called classic paradigm for monetary policy. It exists merely for currency stabilization, neither less nor more. Therefore, monetary authorities often forget about the whole economic system since they focused more on the currency. They are too preoccupied by a single leaf and forget to see the whole forest.
In fact, monetary policy plays big role in economies. They can create major changes on the system just by imposing any single monetary policy. A monetary policy can affect economic growth, deciding the whether government's goal can be achieved or not. However, it seems that monetary authorities often take monetary policy easy since the existence of the false paradigm discussed above.
Do you remember Phillips Curve? It is a curve which explains about the relationship between unemployment and inflation, and in the expansion, explains about the relationship between economic growth and inflation. It should be a somewhat useful tools on deciding what kind of monetary policy should be implemented. However, classic paradigm considers that reducing unemployment is not the task for central banks, another false paradigm of monetary policy.
In addition, we always thought that monetary authority should not think about the poverty eradication, let it be government's mind. It was during my undergrad thesis that I realize that people are too rigid on the classic paradigm. When I was writing about the "Pro-poor Monetary Policy", I always heard people commenting about my work said that there is no way monetary policy can be directed to alleviate poverty or that the relationship is way too far to be implemented.
I guess that is wrong.
The truth is the poor is affected by the monetary policy. The easiest examples is how the poor would suffer if the inflation jumps more than their increase in income. However, this price stabilization is still the classic paradigm. But, it is true, isn't it, that monetary policy do affect the poor? How can we said that monetary policy cannot reduce poverty. It can! In fact, it is a powerful tools that can combat poverty and unemployment in quick re-active and pro-active manner, because contrary to the rigid fiscal policy, monetary policy is way more flexible to change in different times.
I am not going to talk about pro-poor monetary policy here. It is only just a little example. Why do I say little? Because, all of it is just a small fragment of the whole economy. The new paradigm of monetary policy is the paradigm that the monetary policy should consider the whole economy on its decision. Price, currency and banking is only just leaves in the forest. Why are we reducing central banks' role to a very small task when they have great potentials of affecting the whole economy?
Central bankers should not be pre-occupied by the false pillars of central banks task. There are more than that which we should explore more. Monetary policy does have a multi-dimensional features. Moreover, it is a modern, flexible mechanism which bears the potential of controlling and creating an environment conducive for economic targets, i.e. poverty eradication.
More research on monetary policy dimensional impact should be researched even more. We must not consider it as an easy and closed tool. We must expand it and use it to improve our economy even more.
Economists! Think outside the box!!
Wirapati
