until the asian crisis hit in 1997, the existing restriction on capital inflows were only applied to foreign borrowings by banks and companies with government - linked projects and net open foreign exchange position ( nop ) on banks as a prudential regulation. prior to the crisis, this system had contributed to sustained high economic growth, thereby promoting our long term development program. foreign capital inflows had also fostered the deepening of domestic financial sector by expanding market liquidity. however, the benefits of capital inflows, in particular in the early 1990s, were undermined by financial market imperfection stemming from lax regulation and supervision and moral hazard due to implicit guarantees. these problems were reflected in the inefficient allocation of capital, unhedged foreign liabilities, and inflated asset prices. as market confidence in the prospect of the economy of the emerging market in asia faltered, reversal of capital outflows could not be arrested, thereby leading to capital account crisis. with the hindsight of the asian crisis, the central bank has sought to strengthen the monitoring on the capital movement and minimize speculative transactions. to this end, in 2001 bank indonesia issued a regulation on the non - internationalization of the rupiah. subsequently, when a wave of capital reversal and speculation against the rupiah triggered by rising world oil prices heightened in 2005, we issued a series of micro policies addressing the imbalances in the demand and supply in the forex market. furthermore, prudential regulation in the banking sector was also strengthened through a tighter ruling on the nop and particular transactions in forex trading. indonesian floating exchange rate regime needless to say to fellow governors that the choice of an exchange rate system depends to a great extent on the condition of a country at a given time. in the current context of indonesia, under a free capital mobility and limited amount of international reserves, we believe that our floating exchange rate system adopted on august 14, 1997 is an optimal choice. the system, we believe, provides a built - in discipline in a market whereby all other infrastructures are not sufficiently strong. this float will in part create a break on imprudent overseas borrowing, because in doing so market participants will have to factor in the cost of possible movements of rupiah. we are fully aware that in the case of domestic financial markets with imperfections, such as the thin forex market and limited availability of hedging instruments, a floating rate system often leads to high vol

, such as job creation and improvement of incomes. for this reason, the inflation targeting framework retains the fundamental monetary policy paradigm of striking the optimum balance between inflation and output. apparently, when a central bank faces a dilemma of choosing between inflation and growth, inflation remains the priority. an example of this can be seen in the problems we faced last year, when world oil prices almost doubled. this disturbing trend became highly problematic for monetary policy because not only did it boost inflationary pressure, but also inhibit economic growth. many suggested that the central bank did not need to respond to this temporary surge in inflation. however, our view at the time was that despite the temporary nature of the disturbance, the inflationary impact emanating from the higher oil prices through increased price for other goods and services, such as transport and wages, would drive up core inflation. in this situation, the tight policy was necessary to prevent sustained escalation in public inflation expectations. the third characteristic of the itf is that monetary policy is implemented on a transparent basis with measured accountability. in my view, with elements like these, inflation targeting is more than a mere framework for monetary policy. inflation targeting promotes the good governance of a central bank. by announcing the inflation target to the public, the central bank commits itself to its achievement. uncertainty over future inflation will ease because public inflation expectations have a point of reference, and thus economic costs arising from uncertainty will also be reduced. communication to the public on the future monetary policy direction is also vital so that the public can anticipate the central bank monetary policy and to avoid ‘ surprises ’ that could trigger volatility in the money market. to strengthen policy effectiveness in this present age of disclosure, the central bank must also carry out a process of educating the public on what the monetary policy objectives are, the strategy for achieving these objectives, and what lies behind the decisions taken. one example involves the communication of the monetary policy response to soaring oil prices and risks from global imbalances at a time of weak conditions in the real sector and high unemployment. communications between the central bank and market players are also necessary, especially when financial markets are experiencing turbulence. in financial markets fraught with asymmetric information, the wealth of information held by the central bank is frequently of great benefit in mitigating this issue and thus preventing panic and herding by investors. in this regard, the credibility of the central bank is crucial. concluding remarks under the environment of financial integration, the task of