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Fine-Tuning an Open Capital Account in a Developing Country: The Indonesian Experience

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Abstract

Indonesia has operated a liberal capital account permitting relatively free flow of international non-FDI flows since the early 1970s. In this paper, we review the Indonesian experience and the effectiveness of capital restrictions during 1990–2010 using a SVAR model of the Indonesian economy. Because of severe data problems in the pre-1997 period and because the Indonesian monetary policy and broader macroeconomic regime underwent fundamental changes since the 1997 crisis, we also estimated a model separately for the 2000–2010 period. Both sets of results suggest that inflow and outflow restrictions have been effective for FDI but largely ineffective for portfolio capital. However, the 2000–2010 model results indicate not only that restrictions on inflows have a short-term impact on restricting portfolio flows, but also suggest that controls on inward portfolio investments have some ability to shift funds from short-term to longer-term markets, though the impact is short-lived.

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  • Jayasuriya, Sisira & Chen-Yu Leu, Shawn, 2012. "Fine-Tuning an Open Capital Account in a Developing Country: The Indonesian Experience," Asian Development Review, Asian Development Bank, vol. 29(2), pages 136-180.
    • Handle: RePEc:ris:adbadr:2748
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    Cited by:

    1. Stephen Grenville, 2021. "The International Monetary Fund and capital flows," Departmental Working Papers 2021-16, The Australian National University, Arndt-Corden Department of Economics.
    2. Sen Gupta, Abhijit & Sengupta, Rajeswari, 2014. "Capital Flows and Capital Account Management in Selected Asian Economies," MPRA Paper 58982, University Library of Munich, Germany.
    3. Sisira Jayasuriya & Shawn Leu, 2017. "Volatile Capital Flows and Macroeconomic Performance in Indonesia: An SVAR Analysis," Economic Papers, The Economic Society of Australia, vol. 36(2), pages 135-155, June.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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