This essay examines the choice of monetary policy instrument for a small open economy under flexible exchange rate regime with some reference to Indonesia. To approach the issue a simple ad-hoc aggregate supply-IS-LM model is used for the analysis. Although basically the issue concerning...

Empirical studies on the process of monetary policy making in a number of advanced economies have shown that a simple policy reaction function (PRF) performs well in explaining the setting of monetary policy. This paper examines an application of a simple PRF in an attempt to broaden the...

The paper outlines some alternative methodologies for estimating the monetary policy reaction function. It also discusses some of the advantages and disadvantages for each available alternative to be implemented in the case of small developing economies. Additionally, a simple case study using...