Central Bank Credibility and Monetary Policy: Evidence from Small Scale Macroeconomic Model of Indonesia

Macroeconomic models are usually developed in a large framework that comprises hundreds of equations. Some pitfalls, however, are inevitable such as a partial failure of forecasts and some theoretical shortcomings of a large macroeconomic model (Lawson 1992 and Wallis 1989). In the early 1990s, small scale macroeconomic model (SSMM) emerged as an alternative tool for comparing the results obtained from larger macroeconomic models. An SSMM is deliberately kept small with a substantial level of aggregation, thus forcing the model to focus on key issues rather than to look at excessive details in the economy. An SSMM is characterized by a compact system of equations that describe the behaviour of key macroeconomic aggregates.