Lesson Learned From Indonesia's Highest Inflation Rate

MUSLIM, PRAMUDIA MULYONO ,

2013 | Tesis | S2 MEP

Indonesia suffered under a high inflation rate in 1966. The inflation rate rose to 635.3% which is the highest rate in the history of Indonesian, even one of the most severe in all Asian countries. The inflation affected the economy and also the politic. During the high inflation period in the 1960s, the average growth of GDP per capita for the period of 1960-1967 declined 0.25% and was subsequently followed by the downfall of the first political and economic regime. This study discusses the IndonesiaÂ’s economy during those few years before 1966 that eventually determine the high-speed acceleration of the inflation rate and years after that showed how the policies undertaken by the administrators could lessen the high inflation rate. Simply, large budget deficits financed by money creation lead to the high inflation rate. The feedback relationship among those two factors made the inflation rate uncontrollable and caused it to reach to levels never imagine before. Starting from the 1960 budget deficits became larger each subsequent year; in 1963 the budget deficits exceeded revenue collection until year 1966. The government intervened with the monetary authority and pushed it to finance the budget deficits by printing endless amounts of money. In 1961 the growth rate of the money supply was 41.4% and it dramatically increased year-by-year to 763.5% by 1966. As a result, the inflation rate increases from 26.9% in 1961 to 635.3% in 1966. Commitment and appropriate policies in the monetary and fiscal space by the government became the main factors to manage the inflation rate during and after 1966. Undertaking the establishment of a balanced budget, management of money supply and an interest rate policy were some of the factors that had a significant effect on the inflation rate. As a result, the inflation rate could be reduced, for the first time in the 1960s settling below 10% in 1969. To analyze those phenomena, macroeconomic theories would be the main analytical tools to show the relationships among the various factors related to the inflation. From the macroeconomics theories point of view, the phenomenon of high inflation in 1966 can be clearly explained. These methods will also show that the success to cope with the high inflation at that time was due to the fact that the government took appropriate actions within the macroeconomic theories corridor.

Kata Kunci : Inflation, Budget Deficits, Money Creation, Monetary Authority, Macroeconomics Theories.