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Volatile Capital Flows and Macroeconomic Performance in Indonesia: An SVAR Analysis
Author(s) -
Jayasuriya Sisira,
Leu Shawn
Publication year - 2017
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12168
Subject(s) - economics , monetary economics , monetary policy , exchange rate , counterfactual thinking , volatility (finance) , inflation targeting , autoregressive model , macroeconomics , inflation (cosmology) , capital (architecture) , econometrics , philosophy , physics , archaeology , epistemology , theoretical physics , history
We estimate a small open economy structural vector autoregressive model for Indonesia that takes into account its susceptibility to significant cross‐border capital and financial flows. In anticipation of a recovering U.S. economy accompanied by monetary policy normalisation, global push factors are important drivers of capital flows and domestic economic performance for Indonesia. In the post‐1997 period, exchange rate stabilisation remains a key element of monetary policy formulation with the aim of anchoring investor confidence and maintaining inflation stability. Counterfactual simulations show that volatility in inflation and exchange rate increases when endogenous monetary policy responses are switched off.