Market intervention in the inflation targeting regime: the case of Indonesia

This paper aims to analyze the monetary authority's decision to intervene in the foreign exchange market in the inflation targeting regime. Different from previous studies, the present study expands the intervention not only in the currency but also in the security markets. Taking the case of Indonesia over the period from 2005 (7) to 2023 (12), the two-stage least squares and generalized method of moment estimations found that exchange rate fluctuations dominantly affect the monetary authority intervention in both markets. Exchange rate movements are associated with a 1.35% increase in currency market intervention, consistent with precautionary motives. Meanwhile, the impact of financial stability depends on the methods used and episodes of economic uncertainty, particularly in relation to capital outflows. However, inflation pressure from the target has little to no effect on the intervention. Those findings suggest that the trilemma impossibility among credible monetary policy, exchange rate, and capital mobility holds. Accordingly, a discretionary intervention strategy could save foreign reserves as well as avoid confusion between exchange rate and inflation stability goals.