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

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  • Sisira Jayasuriya
  • Shawn Chen-Yu Leu

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.

Suggested Citation

  • Sisira Jayasuriya & Shawn Chen-Yu Leu, 2012. "Fine-Tuning an Open Capital Account in a Developing Country: The Indonesian Experience," Asian Development Review (ADR), World Scientific Publishing Co. Pte. Ltd., vol. 29(02), pages 136-180, December.
    • Handle: RePEc:wsi:adrxxx:v:29:y:2012:i:02:n:s0116110512500151
    DOI: 10.1142/S0116110512500151
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    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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