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The Impact of Capital Reversal and the Threshold of Current Account Deficit on Rupiah

Author

Listed:
  • M. Noor Nugroho
  • Ibrahim
  • Tri Winarno
  • Meily Ika Permata

    (Bank Indonesia)

Abstract

This paper studies the effects of foreign capital flows toward the exchange rate of rupiah both in total and across types of capital investment. This paper also analyzes the thresholds of current account deficit which significantly affect the rate of Rupiah. The estimation shows the capital outflow affect the rate of Rupiah to depreciate and is larger than the appreciation pressure of capital inflow (except when invested in Certificate of Bank Indonesia, SBI). Furthermore, the rate of Rupiah is more sensitive on government bond (SUN) than stock or SBI. The yield of this government bond largely affects the probability of the capital reversal. Related to the current account, the estimation shows that after exceeds the threshold of USD980 million monthly deficit orabout 2% of GDP, the exchange rate will depreciateby 12.7% (m-o-m) with the lag effect of 4 months.

Suggested Citation

  • M. Noor Nugroho & Ibrahim & Tri Winarno & Meily Ika Permata, 2014. "The Impact of Capital Reversal and the Threshold of Current Account Deficit on Rupiah," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 16(3), pages 1-26, January.
    • Handle: RePEc:idn:journl:v:16:y:2014:i:3:p:1-26
    DOI: 10.21098/bemp.v16i3.445
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    Cited by:

    1. Wahyoe Soedarmono & Iman Gunadi & Fiskara Indawan & Carla Sheila Wulandari, 2022. "The Dynamics Of Foreign Capital Flows In Indonesia: Sources And Implications On Bond Market And Bank Stability," Working Papers WP/03/2022, Bank Indonesia.
    2. Wei Kong & Wenxiu Hu & Kaicheng Liao & Xiaoqiang Ma, 2021. "Local Financing Platform Loan and Performance of City Commercial Banks: Evidence from City Commercial Banks in China," Hacienda Pública Española / Review of Public Economics, IEF, vol. 238(3), pages 81-99, September.
    3. Akram, Vaseem & Rath, Badri Narayan, 2020. "Optimum government size and economic growth in case of Indian states: Evidence from panel threshold model," Economic Modelling, Elsevier, vol. 88(C), pages 151-162.

    More about this item

    Keywords

    Capital flows; exchange rate; current account deficit; threshold.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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