The political economy of central bank independence : a case study of bank Indonesia diminishing level of independence under Act no.3/2004

• Main Author: Avina Nadhila Widarsa
• Other Authors: J Soedradjad Djiwandono
• Format: Theses and Dissertations
• Language: English
• Published: 2014
• Subjects: DRNTU::Social sciences::Economic development
• Online Access: http://hdl.handle.net/10356/55270
• Institution: Nanyang Technological University

The discourse of central bank independence in Indonesia was finally converged into reality in 1999. It was the time when President BJ Habibie expelled the Central Bank Governor from cabinet member and the parliament amended the Central Bank Act No. 13/1968 to Act No. 23/1999. The birth of central bank independence in Indonesia was seen as a remarkable reform in Indonesian economy. Under Act No. 23/1999, Bank Indonesia was granted a high level of independence in terms of goal and instrument. However, after Habibie stepped down, Bank Indonesia could not retain its high level of independence. The newly amended Central Bank Act No. 3/2004 reduced the central bank independence to some degree. It removed the goal independence given while it strengthened the role of the central bank as a lender of last resort. This research aims to analyze the factors behind the diminishing level of central bank independence, putting the emphasis on political motivation factors. Using the process tracing and literature review as methods, this research carefully examined the academic literatures and annual report of Bank Indonesia. Grounded with the Agency Theory as theoretical framework, this study suggests that the lack of political commitment, the change in domestic political environment and the Global Financial Crisis contributed to the diminishing level of Bank Indonesia's independence under Act No. 3/2004.