In the wake of the New Order under Soeharto, Indonesia conducted a rehabilitation and stabilization programme to boost its economy that nearly collapsed. It started by implementing fixed exchange rate under the Bretton Woods.
The collapse of Bretton Woods made many countries (including Indonesia) adopt crawling-peg exchange rate, where the exchange rate was the main tool to achieve intermediate targets (low unemployment rate, economic growth, etc.) and low inflation rates in the long run (exchange rate targeting).
After years relying on intermediate targets by conducting short-term manipulation of monetary policy (monetary targeting) to achieve other goals, such as higher employment rate and output, in the early 1990s pioneered by Canada, Sweden, New Zealand, and Great Britain, they began to focus on the inflation rate itself. This was followed by some developing countries such as Brazil, Chile, Mexico, Poland, South Africa, and Czech Republic.
Under this regime, the central bank has to announce a target for inflation in the medium term, and is responsible for achieving that target. To conduct this, the central bank must be operationally independent of government influence.
Based on the experiences of some countries adopting Inflation Targeting, Indonesia has been trying to implement this policy. Due to some lacks in the initial conditions for conducting Inflation Targeting, Indonesia has not purely adopted this policy.
Starting from 2000, the Board of Governors of Bank Indonesia started to implement this policy by projecting that the core inflation was between 3%-5%, with 2% inflationary impact of the government's price and incomes policy, over and above that target. This thesis analyses preparation of Bank Indonesia in adopting Inflation Targeting.