The Trilemma, Inflation and Central Bank Balance Sheet: The Case of Indonesia

Abstract

This paper aims to understand the relations between Indonesia's impossible trilemma and inflation. The study found the monetary policy framework implemented by Bank Indonesia has led the trilemma configuration in Indonesia into a more flexible exchange rate regime, greater monetary policy independence, and growing financial integration. This fact eventually has contributed favorably in lowering inflationary pressures in Indonesia. However, living with the trilemma in the open economy has a consequence. During the resurgence of capital inflows since the early of 2009, the sterilized FX intervention strategy conducted by Bank Indonesia to prevent excessive volatility of rupiah and support price stability has raised the outstanding of open market operations instruments and shifted Bank Indonesia's balance sheet