MONETARY POLICY

Monetary policy is a policy from government to regulate the condition of economy in our country by setting the number of money flows. This policy divided into 2 categories; contrctive monetary and expansive monetary. 

Contractive monetary is a policy that will be run by government which is delegated by Bank of Indonesia depends upon Indonesia regulation (UU nomor 23 tahun 1999), that Bank of 

Indonesia will decrease the number of money flows by contractive monetary. But, government will runs exspansive monetary if they want to increase the number of money flow.

There are 4 instruments to work on this policy, they are:

1. Open market operation
2. Discount Rate
3. Reserve requirement ratio
4. Moral persuasion

1. OPEN MARKET OPERATION

Open market operation is one of steps that will be done by government in monetary policy by buying and selling 'government securities', such as: SBI, SBPU.

If government assumes that Indonesia in inflation condition so, they will cut the money flows in public by selling the government security. They sell it in giro, deposite andsaving form.

If government assumes that our economy needs stimulation to develop our economy activity or increase the money flows, so government buy the government security from public in promissory form.

2. Discount Rate

Discount rate are steps that will be taken by government to set the money flows in monetary policy, too

They do that by up and down the rate of interset in our country and it will be run in all public banks. If the number of money flows in public is high, government will improve the rate of interest, in order public are interested to save their money more, and money flows is down. But If government knows the number of money flows in public is down, the government will decrease the rate of interest in order public more interested to get credit from bank and number of money flows is up.

3 Reserve Requirement Ratio.

Government decides the number of persentation of Indonesia Bank reserve requirement, how much to save and how much to share to public as credit. the higer Indonesia Bank decides the persentation to be saved the lower will be credit for public. For example: If government says that the reserve requirement of Indonesia bank should 10%  means that from 100% funds which got by BI 10% will be saved and 90% will be share to public as credit. Multiplication from this number is 10. But if government decides that the reserve requirement ratio of Indonesia bank should higher ex;20 % means that the persentation for public only 80%. The multiplication is 5. From this, we could conclude that by increasing the reserve requirement of Indonesia bank the number of money which flows to the public will be down.

4 Moral Persuasion

the government has authorize to suggest the public bank to limit their desire to borrow money from Indonesia Bank (watch out to the discount rate fasility, it could cause the inflation).

for example: the governoor of Indonesia bank could suggest to Public Bank not to get loans so much from Indonesia Bank.