Inflation targeting boosts credibility, reshapes economic models in Indonesia.
A study created a model to understand Indonesia's economy. They found that the best model doesn't need certain common features like habit formation or backward-looking price changes. Instead, having money-holding friction is important. After Indonesia started targeting inflation, people in the economy trusted the central bank's ability to control inflation. This means habits and price changes became less important. Central banks should consider which factors to include when using models for policy decisions.