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Trilemma and macroeconomic policies under different financial structures in Indonesia

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  • Hadiwibowo, Yuniarto
  • Komatsu, Masaaki

Abstract

This paper examines the macroeconomic "trilemma" and international capital flows under different financial structures in Indonesia. The paper also reviews uncovered interest parity and uncovered equity return parity conditions. We divide the period of analysis into two sub-periods: before and after the Asian financial crisis of 1997/1998. The exchange rate was managed before the Asian financial crisis and floated afterwards. We find that the domestic interest rate followed the movement of the benchmark rate before the crisis. This fact signifies limited monetary policy freedom. However, exchange rate movement seems to be influenced by factors other than interest rates during the whole period. Interestingly, we find that international capital flows did not respond as expected to changes in the domestic interest rate after the crisis. The paper concludes with considerations on the efficacy of monetary and fiscal policy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 22 (2011)
Issue (Month): 4 (August)
Pages: 302-310

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Handle: RePEc:eee:asieco:v:22:y:2011:i:4:p:302-310

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Web page: http://www.elsevier.com/locate/asieco

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Keywords: Trilemma Mundell-Fleming Uncovered interest parity Monetary policy Fiscal policy;

References

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  1. Takatoshi ITO, 2007. "Asian Currency Crisis and the International Monetary Fund, 10 Years Later: Overview," Asian Economic Policy Review, Japan Center for Economic Research, vol. 2(1), pages 16-49.
  2. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.
  3. Obstfeld, Maurice & Shambaugh, Jay C. & Taylor, Alan M., 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," Center for International and Development Economics Research, Working Paper Series qt4rq9v2rb, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
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  7. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series 0529, European Central Bank.
  8. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized portfolio capital inflows in emerging markets: sterilization, expectations and the incompleteness of interest rate convergence," Pacific Basin Working Paper Series 95-04, Federal Reserve Bank of San Francisco.
  9. Robert P. Flood & Andrew K. Rose, 2002. "Uncovered Interest Parity in Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 6.
  10. Montiel, Peter J., 1993. "Capital mobility in developing countries : some measurement issues and empirical estimates," Policy Research Working Paper Series 1103, The World Bank.
  11. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February.
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