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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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  • Hadiwibowo, Yuniarto & Komatsu, Masaaki, 2011. "Trilemma and macroeconomic policies under different financial structures in Indonesia," Journal of Asian Economics, Elsevier, vol. 22(4), pages 302-310, August.
    • Handle: RePEc:eee:asieco:v:22:y:2011:i:4:p:302-310
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    1. Milena Lipovina-Božoviæ & Maja Ivanoviæ, 2018. "Capital flows in Montenegro: SVAR model," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(2), pages 647-675.
    2. Gabriel Caldas Montes & Irineu da Silva Rodrigues Júnior & Júlio Cesar Albuquerque Bastos & Linican Monteiro Batista, 2024. "Effects of monetary policy credibility and the open economy trilemma on monetary policy efficiency," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1236-1258, April.
    3. Taofeek Olusola Ayinde, 2022. "Modelling macroeconomic trilemma and central bank behaviour in Nigeria: a Markov-switching approach," Economic Change and Restructuring, Springer, vol. 55(3), pages 1303-1325, August.
    4. Susan Sunila Sharma & Lutzardo Tobing & Prayudhi Azwar, 2018. "Understanding Indonesia’S Macroeconomic Data: What Do We Know And What Are The Implications?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 21(2), pages 217-250, October.
    5. Tomislav Globan, 2014. "Testing the 'trilemma' in post-transition Europe - a new empirical measure of capital mobility," Post-Communist Economies, Taylor & Francis Journals, vol. 26(4), pages 459-476, December.

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