Rupiah collapse and the road to inflation targeting

Indonesia's rupiah was allowed to float in August 1997 as pressure from the regional crisis became unsustainable, and it then collapsed far beyond what a float alone would suggest: it lost about 95% of its value against the dollar during 1997 and a further 73% in 1998, while the economy contracted roughly 13.7% and inflation hit 58% in 1997 before surging again the next year. Bank Indonesia pumped in massive liquidity to keep banks from collapsing outright - broad and base money each grew around 30% between December 1997 and March 1998 alone - even as the government turned to the IMF in October 1997 and the central bank later adopted a soft inflation-targeting framework in 1998, gaining formal independence in 1999. Decades later, Governor Perry Warjiyo has repeatedly invoked that experience - alongside 2008 - to explain why Bank Indonesia now avoids repeating the aggressive, reserve-draining spot-market interventions of 1998: large-scale defense of the rupiah back then, he has said, cured currency instability only by creating a new liquidity squeeze, a lesson now reflected in BI's preference for calibrated secondary-market bond purchases over blunt currency defense.