MONETARY POLICY ON CONTROL TOTAL MONEY CIRCULATING
By: JHONSON A. SUTANTO
CHAPTER I
INTRODUCTION
Understand how large the influence of the monetary economy, and that iu the intent of living of the people, the economy in a particular order-for example-a country need to be in the monetary field. These settings are known as ordinary or a monetary policy. A monetary policy in general aims to maintain stability and value for money and encourage a smooth production and development to improve people's standard of living. See the relevance between the monetary and the real sector or with the macro economy, monetary policy can be said is an important part of macro economic policy.
Monetary policy - the policy together with other sectors - is intended to support the achievement of targets to be achieved in the macro economy. To achieve this, a monetary policy directed to the amount of money circulating in the community in line with the development of the entire economic sector. With the growing amount of money to set up circulating in the community, monetary authority (ie Bank Indonesia) can affect the value of money and the interest rate such that its development will be able to stimulate the economy to the desired direction in accordance with the goals of national development. In determining a monetary policy, of course must have a basic theoretical foundation that has been teruji or at least the experience can be a reference. One thing that becomes the basis for the theory, monetary policy is the supply and demand money. This foundation needs to be understood in detail because the core of monetary policy is about the money. Of course, the money here not only in understanding the physical, but the money in the sense of the broadest.
In human civilization, money has provided a great benefit. Based on the function-function, namely as a means of transaction, a computation, storage and value, cash benefit for people in overcoming difficulties to make a variety of economic activities, such as trade, investment, consumption, and save money. Money to benefit the public will demand money by motives different, among others for the purpose of the transaction, precaution and speculation. View from the side, there are two things that determine the amount of money bid, the money primary (which is the monetary authority) and multiplier. The primary amount of money determined by several factors and some of these factors can be managed or controlled by monetary authority.
Interaction between power demand and supply to determine akan iuang outstanding money market conditions. The money market conditions, reflected in the growth rate and the amount of money circulating. Furthermore, the money market after the market with goods in turn will determine the real sector, the national income, economic growth, kesmpatan employment, price level, and balance of payment. As an illustration, it can be that if the amount of money circulating is enlarged and exceeded that required by the community in the interest rate, income, and prices, the increase in the amount of money circulating will encourage people to spend money to increase the demand on the top of the goods and services for consumption and factor - factors of production to investment.
CHAPTER II
Discussion
Interaction between power demand and supply of money will determine the market conditions as reflected in the money growth rate and the amount of money circulating in the economy. The development of money markets in turn will affect the real sector economy such as national income, economic growth, employment, prices, and balance of payment. In line with the transmission mechanism, monetary policy, the two approaches used by the central bank in monetary policy operations, the quantity approach (Monetary targeting) and the price (interest rate targeting).
Monetary approach in targeting, central banks will use the money circulating as operational targets. To achieve the final goal, such as inflation and economic growth, central bank controls the money will be circulating. As an illustration, it can be that if the amount of money circulating in excess of the desired or requested by the community, people tend to spend the money by increasing the consumption of goods and services. Throughout the production capacity is still available, the increase in consumption would increase production and expand employment opportunities. However, when production capacity has been saturated, the increase demand goods and services will increase the prices in general and in turn, will put pressure on the balance of payment as part of the expenditure used to purchase goods and services imports .
Through controlling the amount of circulating money, central banks attempt money market conditions change such that development can encourage economic growth, expand employment opportunities, maintaining price stability and balance of payment equilibrium. Step by step control the amount of money circulating is called monetary policy (Monetary policy). Than through the control of the money circulating (Monetary targeting), monetary policy can also be implemented through the control of interest rates (interest rate targeting). With the control of interest rates, central banks can control the direction of the economic objectives set. For example, in order to encourage economic activities, central banks lower interest rates. With the decline in interest rates, means that the cost of capital or cost of funds to be cheaper so that encourage consumption and investment, and in turn economic activities.
Next, will be described in detail about the approach to monetary policy Monetary targeting. In this approach, we will often hear the term monetary program, the projected monetary control and the money circulating. Monetary policy through the control of the money circulating set begins with the end goal, such as inflation, economic growth and job opportunities. The final goal is in harmony with economic capacity, for example, inflation is defined in line with economic capacity. Next, on the basis of the final goal, the projected demand of money, people and everything is described in detail in the monetary program.
On the basis of a monetary program the central bank to control the amount of money circulating in line with that money demand in the economy through the instrument held. Monetary instruments include open market operations, reserve requirement or mandatory minimum current account, discount facilities, intervention foreign exchange, and moral suasion.
2.1 Monetary Program
To implement monetary policy with good monetary authority to create a projected amount of money outstanding, both from the side, and the demand for a certain time, commonly referred to as the monetary projections. Monetary projection is useful because it can provide information on what action should be taken by central banks that set targets to be achieved. In addition, the projection can also provide information to the central bank about what will happen to the economy on the monetary policy will be adopted by the central bank than the central bank when the central bank monetary policy does not cover it.
In preparing the projected monetary, central banks need to first me-review / observe some monetary statistics data last time that was needed to prepare the projected monetary accurately. Development of the monetary statistics is the amount of money circulating and the factors that. Monetary statistics data analysis done in a static and dynamic. Static analysis is done to find out how much money circulating and the factors determine at a particular time, where as dynamic analysis is done by comparing statistical data of money circulating in the two different time to see changes in the amount of money circulating and the factors that influence with it.
2.2 Monetary projections
Another case with the preparation of statistics circulating money is in essence a technical work, preparation of projected monetary prosecuted more theoretical knowledge and analytical ability to be able to generate the projected monetary carefully, so that it can be used to head the authority to set monetary policy in a monetary fine. Step-step preparation of the projected monetary usually follow the stages as follows:
- First set first target macro (macro objective) economy for a period to come. The target is a macro-level economic growth, inflation and interest rates.
- After the set target growth, prices, and interest rates, through a functional relationship can be a projection of how many people will demand money (demand for money) to the needs of the transaction, precaution and speculation. As known that money component of money circulating kartal, giral money, and quasy money.
- In the monetary program, the estimated amount of money requested by the community is called "monetary target planning." This means the number of bid money will be governed by central banks in accordance with the "target monetary planning" so that the macro economic targets, namely the level of economic growth, inflation, and interest rates the previously defined can be achieved with good.
2.3 Control of Money circulating
In fact, the outstanding money held by central banks to influence the factors that cause money outstanding. The factor’s cause of include net foreign assets (NFA) and net domestic assets (NDA). These factors include the causes net foreign assets (NFA) and net domestic assets (NDA). NDA such as net claims on government (NCG), net claims on official entities and net claims on private sector ( net domestic credit , NDC), and net other items (NOI). NDA consists of net claims on government (NCG), net claims on official entities and net claims on private sector (net domestic credit, NDC), and other items net (Noi).
Given the NFA is a reflection of a transaction relating to the payment balance, the development can not be controlled entirely by central banks as well as the NFA, the NDA also, there is a difficult controllable, ie, NCG and Noi. Second factor is determined by the level of government that are difficult to be outside the control of development and central bank. Therefore, the only factor that can be influenced / is controlled by a central bank is NDC (credit banks). Control of bank loans made through the control of réservés banks (devices consisting of a liquid cash account and the banks).
As known, the ability to give the bank credit affected by the reserve. The greater the reserve. The large reserve banks, the greater its ability to provide loans and similarly vice versa. With the reserve banks, central bank expects bank loans may be consistent with the objectives and increase the amount of money outstanding as described above.
How to be a central bank in controlling the reserve banks are as follows:
· At first, central bank estimated average immediately duty of banks (obligation) such as demand deposit and time deposit. Estimated size of the obligation immediately is the banks can be obtained from the projected public demand will money.
· After the immediate obligations of banks, the next can be estimated how much demand for reserve banks. As known that the demand for reserve banks consists of the demand for required reserve and excess demand for reserve. The amount of demand for the required reserve amount can be estimated easily because the percentage of obligations that must be kept in the form of liquid instruments set by central banks (cash ratio). Meanwhile, demand for excess reserve can be estimated based on empirical data, the percentage of certain obligations and immediately.
· The next step is the projection on the supply of reserve money. Projections are done with the estimate of the factors that affect reserve money (money primary) reflected as assets on the balance sheet monetary authority. Supply of money is the primary part of the community directly to the form of money and the rest kartal to banks in the form of a reserve currency and checking account kartal banks.
Then, the estimated supply reserve banks compared with the estimated demand reserve banks. When that happens excess supply through open market operations, namely to sell securities short term, central banks can take up the excess reserves. Conversely, when there was lack of supply, Open Market Operations (opt) is done by buying letter of valuable short-term to increase the reserve banks.
So, in general, monetary instruments which can be used to control the money circulating among other open market operations, reserve require, and the discount facility. OPT conducted with the purchase of bonds, government bonds by the central bank will increase the NCG which also means increased Monetary base which in turn increase the supply of money. Instead, the sale of government bonds by central banks will reduce the Monetary Base and the supply of money.
Increasing the reserve requirement ratio (k) will reduce the money supply so that the multiplier is reduced and the decrease in k will increase the supply of money. Through the discount policy, the increasing level of discount (rd), will reduce the desire to banks and central bank loans which in turn will prevent the banks ability to lend money to the private sector and ultimately reduce the amount of money circulating. Conversely, a decrease rd will encourage banks borrow and the central bank will ultimately increase the amount of money circulating.
CHAPTER III
CONCLUSION
Central bank as the monetary authority to function as a regulator and supervisor in determining monetary policy. So in this case, the central bank must take the appropriate steps in determining policy. Maintain monetary stability, is one of the dimensions of national stability, which is part integral and objectives of national development. A steady monetary stability, has a broad influence on economic activities, including in the banking sector. In this case, there are some things that serve as the measurements of these monetary stability in the inflation rate is quite low level., The interest rate at a reasonable level., The rupiah is realistic., Expectations of monetary community.
Through the policy the amount of money circulating, it can maintain monetary stability, which, central banks can increase or decrease the amount of money circulating when it is necessary. This can be done through monetary instruments owned central bank. So ultimately, monetary policy affects inflation.
Reference
Pohan, Aulia. 2008. Kerangka Kebijakan Moneter & Implementasinya Di Indonesia.
Pohan, Aulia. 2008. Potret Kebijakan Moneter
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