MONETART POLICY AND EXCHANGE RATE DYNAMICS IN INDINESIA : AN ANALYSIS OF THE PRE, AND, POST 1997-1998 CRISIS PERIOD

Abstract

This study aims to analyze the dynamics of monetary policy and exchange rate in Indonesia before, during, and after the 1997–1998 monetary crisis. Employing a qualitative descriptive-analytical approach based on secondary data from peer-reviewed literature, this study finds that prior to the crisis Indonesia pursued growth-oriented policies through financial deregulation, yet accumulated structural vulnerabilities including an overvalued exchange rate and large private external debt. The crisis triggered a sharp rupiah depreciation from approximately Rp2,350 to Rp10,013 per US dollar (annual average 1998), prompting major policy responses: adoption of a free-floating exchange rate system on 14 August 1997, monetary tightening, and structural reforms with IMF assistance. Post-crisis, Bank Indonesia undertook a fundamental transformation of its monetary policy framework, shifting from a quantity-based approach (2000–2004) to a price-based (interest rate) approach (2004–present), which has proven more effective in controlling inflation. Exchange rate stability is identified as a key determinant of macroeconomic equilibrium, market confidence, and sustainable economic growth