the role of central banks

The Central Bank plays an important role in controlling inflation. The Central Bank of a country generally sought to control the inflation rate at a reasonable level. Some central banks even have independent authority in the sense that its policies should not be intervened by parties outside the central banks – including the Government. This is because a number of studies show that a less independent central bank--one of them due to government intervention that aims to use monetary policy to push the economy--will drive the inflation rate higher.

The Central Bank generally rely on the money supply and/or interest rate as an instrument in controlling prices. In addition, the central bank is also obliged to control the level of the exchange rate of the domestic currency. This is because the value ofa currency can is internal (mirrored by the inflation rate) and external (exchange rate). The current pattern of inflation targeting by central banks a lot around the world,including by Bank Indonesia.