A False Paradigm of Monetary Policy

This is the result of my discussion with my boss, Mr. Gandjar Mustika, and a quick-reading of Stiglitz's book entitled "A New Paradigm of Monetary Policy".

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

August Rush

This is Ramadhan, the month where people can put their mind at ease, since this is a blessed month. This month people put their mind on how they can celebrate Idl Fitr, what outfits they should buy for the D-Day, arranging fasting break together with friends and any other wonderful things they plan for the glorious month.

Yet, I am here now with my obligation. The research I'm working on "should be" finished on the last of September. And now what? Due to some circumstances, this deadline has been advanced to this Friday, August 20, 2010. Yes, it has been advanced for 1,5 month. Significant, eh?

Due to this *I don't know whether it's a* good news or bad news, I have to forget the rest of wonderful things in Ramadhan and put the most of my mind on it. How great my life can be? All of this happiness I can enjoy in Ramadhan should be postpone for some time. I cannot put my mind at ease at all.

THAT'S WHAT I THINK AT FIRST.

But, now that I think of it. This is my obligation. I may be just a merely research assistant. I may not receive that great appreciation due to this *I don't know actually*. But, responsibility is a responsibility. It is easier to just run from it and finally I can put my body to rest, but no! I don't want it. Though small the responsibility is, but running from it can't put my mind at ease. If I keep on complaining on it, keep on avoiding it, it will become bad habit in the future, where *hopefully* I hold a greater responsibility, may be the fate of this nation lies on my obligation someday. Therefore, I choose not to run, but to put my best on this obligation.

Moreover, it is okay with not enjoying the happiness of Ramadhan, very okay. I remember about millions people out there, who live in extreme poverty, that cannot enjoy buying new outfits for Idl Fitr, fasting break with their companions and family, celebrating the day of glory with delicious food and the warmth of family, and so on. My condition is better than them, way way waaaaay better. They can't choose their condition, while I can still decide what I want to do. They can just accept their fate, while I may have slight chance to decide mine. Therefore, I must not complain, not at all. Most of them are not complaining,

SO, WHY MUST I?

I must be thankful because of my condition. And that makes me my obligation to fulfill my task, gain some fortune from it, and help them to enjoy this glorious month like we use to. But, first, I must finish this research by the end of this week. No complaining. Imagine how happy I can be when all of this burden is finished.

Thus, I hereby announce this month as:

AUGUST RUSH

Dream On!
Bagus Arya Wirapati