Central Banking and Monetary Policy in Muslim-Majority Countries
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Central Banking and Monetary Policy in Muslim-Majority Countries

Akhand Akhtar Hossain

This book reviews key aspects of central banking and monetary policy in selected Muslim-majority countries. While reviewing country-specific experiences and issues in inflation and monetary policy, and analysing them from an historical context, emphasis is given to the evolution of Islamic banking and finance and the consequent institutional developments for maintaining price stability. One recurring theme is that, although Islamic banking and finance may have created some complexities, it remains consistent with Classical monetary theory and has created opportunities for improving the infrastructure of central banks and monetary policy to maintain both price and economic stability. The introduction of Islamic banking and finance strengthens the argument for low and stable inflation and rule-based monetary policy. Monetary policy frameworks in these countries include exchange-rate pegging, monetary targeting and inflation targeting under varied restrictions on capital flows. Macroeconomic problems under these regimes are also highlighted and their policy implications drawn.
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Chapter 5: Indonesia*

Akhand Akhtar Hossain


Indonesia is the largest country in Southeast Asia and has emerged as one of the major global economies. It has come to the forefront of policy discussion and debate since the East-Southeast Asian financial crisis in the late 1990s. In the low inflationary Asia-Pacific region, Indonesia is considered an inflation-prone country. This is largely because of Indonesia’s inflation experiences during the 1950s and early 1960s when ongoing high and volatile inflation took it to the verge of ‘near-hyperinflation’ and economic collapse. Most economists, writing on Indonesia’s economy, have subscribed to the view that this inflationary episode had fiscal-monetary roots. The political change in 1966 and the subsequent stabilization and economic reforms combined to bring inflation to a single-digit level within a remarkably short period of time. In the three decades from the late 1960s to the late 1990s, Indonesia’s inflation remained at a moderately high level, on average within the range of about 10–12 per cent per annum, except during three high inflationary episodes provoked by supply or external shocks (this section uses data based on Table 5.1). The first episode arose from the 1973–74 OPEC oil shock when the inflation rate rose to about 35 per cent per annum. The second OPEC oil shock of 1979–80 pushed Indonesia’s inflation up to about 20 per cent per annum.

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