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Real exchange rate targeting and inflation in Indonesia: theory and empirical evidence

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  • Reza Yamora Siregar

Abstract

Early studies have shown that an exchange rate policy which attempts to stimulate exports through aggressive devaluations is often found to be inflationary. This study tests the validity of this hypothesis for the specific case of Indonesia. To analyze the possible inflationary consequence of the managed floating system of Indonesian rupiah, this paper conducts several times series testings to answer the following questions: (1) Can the study detect any significant effects of government's intervention in the foreign exchange market (forex) in explaining the fluctuations of rupiah?, (2) Has the current practice of managed floating system been inflationary?, and (3) In the final analysis: can the study conclude that the exchange rate management in Indonesia does directly and significantly contribute to the high rates of inflation in the recent years, 1990-1995?

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 96-07.

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Date of creation: 1996
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Publication status: Published in Applied Financial Economics (August, 1999, v. 9, no. 4, p329-336)
Handle: RePEc:fip:fedfpb:96-07

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Keywords: Indonesia ; Foreign exchange - Law and legislation ; Inflation (Finance);

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Cited by:
  1. Uma Ramakrishnan & Athanasios Vamvakidis, 2002. "Forecasting Inflation in Indonesia," IMF Working Papers 02/111, International Monetary Fund.
  2. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283.
  3. Reza Siregar, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp81, June.
  4. Reza Siregar & Victor Pontines, 2005. "Incidence of Speculative Attacks on Rupiah During the Pre- and Post- 1997 Financial Crisis," School of Economics Working Papers 2005-07, University of Adelaide, School of Economics.

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