Basket Of Currencies

in this system, is the main advantage of this system offers the stabilization of a country's currency
because currency movements deployed in the basket of currencies. Currency inserted into the basket
usually determined by the amount of trade finance role in a particular country.

Credit Easing

Credit easing is a form of monetary policy where a central bank aims to increase liquidity (ease credit
conditions) within a specific market sector of the economy through the purchase of financial assets. For
example, the U.S. Federal Reserve has employed credit easing policies via the purchase of mortgage-
backed securities (MBS) in the past. Credit easing may or may not affect the monetary base, depending
on how the purchases are financed (as an example, a central bank might sell government debt to fund
the purchase of corporate debt). Criticisms of credit easing include the view that allocating credit to
specific sectors of an economy is traditionally fiscal policy, not monetary policy.

Exchange rate targeting

The monetary policy strategy of targeting the exchange rate based on the belief that the value exchange
that the most dominant influence on achievement. In the ultimate target of monetary policy
implementation, there are three alternatives that can be taken:

a. by setting the value of the domestic currency against the price of certain commodities
internationally recognized by setting
b. the value of the domestic currency against the currencies of major countries that have low
inflation rate by adjusting the value of
c. domestic currency against the currency of a particular country when changes in currency values
allowed in line with the inflation rate differences between the two countries

the purpose of exchange rate targeting are

 Set the value of the domestic currency against the price of certain commodities (example gold ->
Gold Standard)
 Set the value of the domestic currency against a large country with a low inflation rate (example
Indonesian currency against Germany)
 Crawling peg which is the meaning of crawling peg is a situation where the state is only making a
few changes to its currency on a periodic basis with the aim of moving towards a certain value in
a certain time frame. The main advantage of this system is able to measure the state of
completion in the exchange rate over a longer period.

Flexible inflation targeting

The flexible inflation targeting is set, when the central bank of any country primarily concerned with
factors like stability of interest rates, exchange rates, output and employment.
1. What is monetary policy regime, and why is it important?
Answer :
Most central banks conduct monetary policy within some sort of monetary policy regime. Such a
regime provides a structure for monetary policy decision-making. In addition to facilitating the
decision-making itself, this structure enables the decisions to be communicated more easily to the
public. The basic monetary regimes are :

a. Regime with an implicit nominal anchor

A regime with an implicit nominal anchor involves targeting a particular nominal variable
adopted only internally within the central bank without it being announced explicitly. A
prerequisite for successful functioning of this regime is high credibility of the central bank, which
enables the desired changes in inflation or inflation expectations to be achieved without explicit
targets.
b. Money targeting regime
The money targeting regime focuses on the growth rate of a chosen monetary aggregate. It is
based on the finding that in the long term, price growth is affected by money supply growth. A
problem, however, lies in the choice of an appropriate monetary aggregate to target. In an
environment of financial innovation, market computerisation and globalisation, the relationship
between monetary aggregates and the price level is becoming ever weaker. The central bank
may also fail to manage the selected monetary aggregate with sufficient precision.
c. Exchange rate targeting
Under the exchange rate targeting regime, the central bank tries to ensure nominal exchange
rate stability vis-à-vis the currency of a so-called anchor country via interest rate changes and
direct foreign exchange interventions, thereby "importing" price stability from the country.
Maintaining the exchange rate requires an appropriate economic policy mix ensuring a low
inflation differential vis-à-vis the anchor country, a sufficient level of international reserves, and
the maintaining of the country's competitiveness and overall credibility, including its
institutional and legislative framework and political stability. One of the major disadvantages of
the regime is the loss of monetary policy autonomy.
d. Inflation targeting
Under inflation targeting, the central bank publicly pre-announces an inflation target (or a
succession of targets) that it is determined to achieve. This involves active and direct shaping of
inflation expectations. This regime's decision-making scheme involves the use of much more
information than merely the exchange rate or monetary aggregates, covering the labour market,
import prices, producer prices, the output gap, nominal and real interest rates, the nominal and
real exchange rate, public budgets, etc.

Why is it important? Because with the monetary policy regime all of parties involved in the
making of monetary policy can not be on intervention by other parties. therefore made the
policy is expected to cover all the peoples of a country. besides the monetary policy regime will
also be able to become a boomerang if misused by irresponsible parties.
2. How can a central bank with an exchange rate targeting regime aim to achieve price stability ?
Answer :
The regime of targeting exchange rates focuses on the economic growth of a country which in
the long term, economic growth is based on the exchange rate. Currency exchange rate is influenced
by the rate of growth of money where money growth is also influenced by the growth of prices.
Therefore, with due regard to currency exchange rates indirectly we have achieved price stability.
An example: in 2015 in January the rupiah exchange rate against the dollar was $ 1 = Rp 10,000 and
the price of imported rice is Rp 10,000 / kg, but in June in the same year the rupiah exchange rate
against the dollar decreased to $ 1 = Rp 14,000 then imported rice price will increase to Rp 14,000 /
kg. it can be seen that with the increase in prices, the money supply will be increasing and will
create instabilities in the market price. Therefore it can be concluded that by targeting the exchange
rate will be able to deliver price stability

3. What is a currency board?

Answer :
A currency board is a monetary authority which is required to maintain a fixed exchange rate
with a foreign currency. This policy objective requires the conventional objectives of a central bank
to be subordinated to the exchange rate target.
In the Currency board system, the amount of currency outside banks (M0) in circulation, first
calculated, then the number is compared to the foreign exchange reserves owned by the
government. M0 is the ratio of the number of foreign reserves then "locked" in a comparison of a
particular exchange rate which is then maintained. Thus, any number of a certain amount will
certainly be exchanged for dollar with the exchange rate.

AN EXAMPLE:
When the Base Money or M0 in Indonesia at the end of December 1997, for example, amounted
to Rp. 46.08 billion and foreign exchange reserves owned by monetary authorities amounted to
about US $ 17.42, billion, then the comparison will get, that any Rp.2.645 = US $ 1, -. With the
exchange rate, the monetary authority is able to guarantee that every Rp 2,645, - will be exchanged
for $ 1, along Base Money still amounted to Rp. 46.08 trillion and growing. If the rate is set higher,
for example Rp. 5000, - per US $, it would require less reserves to maintain the exchange rate (only
about US $ 9.21 billion) so there was still some reserves that could be used to increase the monetary
expansion (M0) in the future.

4. If there a large inflows of capital, what is likely to happen to the country’s exchange rate? Why?
Answer :
If there is a large flow of capital into our country, the exchange rate still stable.
Therefore, large capital flows will help create economic stability for a country. This is because the
incoming capital can play an important role in mobilizing funds and structural changes. With the
capital inflow, the government also can use it to accelerate economic growth. So it can be concluded
that the entry of large capital will be able to create a stable exchange rate of a country if utilized
properly.
5. If there are inflows of capital, conceptually how can the central bank under an exchange rate
targeting regime keep the exchange rate within its announced target?
Answer :
conceptually The effects of capital inflows In a country that is open to international capital
flows, changes in demand for domestic currency would come not only from importers and
exporters of goods and services, but also from international investors. If interna- tional investors
deem that the country is a good investment prospect, then capital would flow into the domestic
economy. In order to invest in the country, interna- tional investors would first have to convert
their foreign currencies into the domestic currency. This would raise demand for the domestic
currency. To meet the demand from international investors, and to keep the exchange rate fixed at
the announced target, the central bank would have to buy up foreign currencies from international
investors and supply them with domestic currency.

6. If a large number of importers need large amouns of foreign currencies to pay for their import
purchases at the same time, what would happen to the exchange rate?
Answer :
a very high amount of imports will lead to depreciation of the rupiah exchange rate against
currencies of other countries. this is because the imported goods cause a reduction in national
income. so export and import must be balanced in order to maintain the stability of the exchange
rate of a country.

7. How can the central bank keep the exchange rate at the announced target if a large number of
importers need large amounts of foreign currencies to pay for their import purchases at the same
time?
Answer :
I think the way the central bank keep the currency exchange rate at the target is to use the
currency board system where the amount of currency (the rupiah) compared to the foreign
exchange reserves (in dollars) that will create a permanent stability of the exchange rate. That's
because the amount of rupiah in circulation directly linked permanently to the amount of dollars
available reserves, and monetary expansion under the authority of the Central Bank were frozen, so
the rupiah can not be increased for any reason, except with the increase in dollar reserves in the
hands of monetary authorities.

8. What might be the reason to say that those countries that have an exchange rate targeting regime
do not have monetary policy independence?
Answer :
because there is a requirement to keep the exchange rate at the announced target level, the
central bank will have to vary the money supply to match changes in the demand for domestic
currency by importers and exporters, as well as international investors and speculators, rather than
adjusting domestic money conditions to directly influence domestic aggregate demand.
An extreme form of exchange rate targeting is the use of a currency board, whereby the
exchange rate is fixed at a particular level and the domestic currency is legally required to be fully
 backed up by foreign currencies held by the central bank. The central bank is legally obliged to
exchange domestic currency for a foreign currency at the specified exchange rate, and thus can
only issue additional domestic currency if it has extra foreign currencies to fully back it up.

9. Why is it impossible for a central bank to achieve an exchange rate target, allow free flows of
capital, and maintain monetary policy independence simultaneously in the long run?
Answer :
This is caused by the inability of a system to take all three. In this case we can only take two
policies only and discard one of them. For example in the figure below. To achieve capital control we
have to choose a policy of exchange rates targeting and independent monetary policy

10. What is the underlying theoretical underpinning of money supply growth targeting?