The success of managing and controlling inflation in Indonesia cannot be detached from the role of Bank Indonesia, which implemented a policy mix with an enhanced inflation targeting framework.
he economy’s performance in 2017 has been promising, with global gross domestic product (GDP) growth forecasts noticing a significant uptick after years of declining optimism since the global financial crisis started in mid-2007.
This optimism induces a good case for slight interest-rate increases. However, this year, the global economy is still witnessing mediocre economic growth together with a trend of too-low inflation, particularly in advanced countries.
Moreover, global recovery will continue to depend on fiscal expansion, which will be necessarily supported by debt monetization. Currently, economic growth has not returned to pre-crisis norms of 1.5 to 2 percent annual growth.
Since 2007, the per capita GDP increase in the United States, eurozone and Japan has stayed at about 5 percent, 0.3 percent and 4.4 percent, respectively.
Supply-side factors become the first culprit of the slowdown, due to structural productivity growth problems. The major determinant of sluggish productivity growth is declining total factor productivity and stagnant investment growth, both in human capital and physical investments.
Besides that, deficient nominal demand exaggerates the problem. In spite of major central banks’ huge stimulus policies, on average, nominal GDP in the 2007-2016 period increased by 2.8 percent annually in the US, 1.5 percent in the eurozone and only 0.2 percent in Japan, making it difficult to reach the targeted economic growth and 2 percent annual inflation rate.
The US Federal Reserve’s fiveyear inflation target has undershot and recent data confirmed that US inflation over the last five months has seen a downward trend.
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