development of domestic financial market, in particular, the government bond market. second, the need to increase the efficiency of domestic money market, which in turn benefits to enhance and to further strengthen banks ’ liquidity management. steps were also taken in the area of improving the capacity of financial institution, as well as improving financial market efficiency. banks are encouraged to strengthen their capital and compel to conduct best practices, especially in the area of risk management. on the other hand, we are also bounded to increase our supervisory capacity to ensure a prudent banking practice. years of strong commitment on reform has resulted in a resilient economic fundamental, at least, in the last five years. the economic growth accelerated to a 10 - year high. fiscal consolidation significantly reduces government debt, a proof of commitment of fiscal discipline. prudent macroeconomic management has also led to the declining trend of inflation and exchange rate volatility as well. in the financial sector, the banking sector is well capitalized and in a better balance sheet structure. strong macroeconomic fundamentals and resilient microeconomics structures lead to better risk perception, or a more accurate valuation from my point of view, as reflected by the recent rating upgrade. but to be frank, i feel that from the sovereign risk assessment, indonesia is still somewhat “ undervalued ”. it is perhaps that major rating agencies tend to be too conservative in assessing indonesia ’ s risk profile. this might possibly be a reflection of the “ traumatic ” view relate to the 1998 crisis. however, the recent update from some rating agencies has become a promising recognition into the fundamental transformation process in indonesia. following standard and poor ’ s, fitch, and moody ’ s, oecd has also upgraded indonesia ’ s country risk classification ranks from 5 to 4 on early april 2010. similar progress also came from the ranking upgrade of our global competitiveness index from 72 in 2003 to 54 recently. prospect and challenge ahead global recovery coupled with favorable risk perceptions support our optimism toward the outlook in 2010 and 2011. we are quite confident that the indonesian economy will grow at around 6. 0 % in 2010 and to 6. 0 – 6. 5 % range in 2011. this is mainly supported by the upturn on export and increasing investment. for the next periods, we expect that the economy will keep growing in an upward trend given the proven strong commitment from the government to implement reform measures on infrastructure projects and investment climate. on the later, it is important to

perry warjiyo : us monetary policy normalization and eme policy mix – the indonesian experience speech by mr perry warjiyo, deputy governor of bank indonesia, at the nber 25th annual east asian seminar on economics, tokyo, 20 – 21 june 2014. * i. * * introduction indonesia is weathering relatively well this year the spillovers from the us monetary policy normalization process. in fact, over the past two months portfolio inflows are increasing, equity prices are rebounding, bond yield is decreasing, and exchange rate is appreciating ( graph 1 - 4 ). this is evidence that strengthening domestic macroeconomic fundamentals and financial system stability plays crucial role for minimizing the spillovers. the aggressive and bold measures of monetary and macroprudential policy mix since june 2013 have resulted in streams of positive news of benign inflation, faster than expected decline in current account deficit, and better than expected gdp growth to the markets. this note draws indonesian experience on the transmission mechanism and policy responses to global monetary factors, with a focus on the recent episode following the fed announcement of planned tapering in may 2013. in particular, three main issues will be discussed. first, the setting of interest rate supported by exchange rate flexibility and capital flows management in responding to policy trilema arises from global monetary factors. second, the efficacy of macroprudential measures in reinforcing lending channel of monetary transmission mechanism at the back of volatile capital flows and underdeveloped financial market. and third, the important of financial market deepening in smoothing out the transmission of global monetary factors to domestic monetary and financial system stability. ii. making possible the policy trilemma the ump and its normalization process give rise to policy trilemma of the optimal setting on interest rate response, exchange rate flexibility, and some forms of capital flows management. interest rate policy needs to be geared toward maintaining price stability, taking into account the impacts of global interest rate and some rooms of exchange rate flexibility as shock absorber. but market over - reaction and structural rigidities may cause unnecessary exchange rate overshooting and volatility that may hamper growth as well as overall monetary and financial system stability. volatility in the capital flows is also complicating the optimal monetary policy response for achieving domestic economic objectives. for indonesian case, we cope with this policy trilemma through a monetary and macroprudential policy mix, consisting of interest rate response complemented by some exchange