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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?

Suggested Citation

  • Reza Yamora Siregar, 1996. "Real exchange rate targeting and inflation in Indonesia: theory and empirical evidence," Pacific Basin Working Paper Series 96-07, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:96-07
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    References listed on IDEAS

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    1. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
    2. Paul Krugman, 1995. "Growing World Trade: Causes and Consequences," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 327-377.
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    4. Arvind Panagariya, 1994. "East Asia and the New Regionalism in World Trade," The World Economy, Wiley Blackwell, vol. 17(6), pages 817-839, November.
    5. Raymond Vernon, 1966. "International Investment and International Trade in the Product Cycle," The Quarterly Journal of Economics, Oxford University Press, vol. 80(2), pages 190-207.
    6. Colin Kirkpatrick, 1994. "Regionalisation, Regionalism and East Asian Economic Cooperation," The World Economy, Wiley Blackwell, vol. 17(2), pages 191-202, March.
    7. Kojima, Kiyoshi, 1985. "Japanese and American Direct Investment in Asia : A Comparative Analysis," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 26(1), pages 1-35, June.
    8. Frankel, Jeffrey A. (ed.), 1997. "The Regionalization of the World Economy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226259956.
    9. Tom Jackson, 1991. "A game model of ASEAN trade liberalization," Open Economies Review, Springer, vol. 2(3), pages 237-254, October.
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    Cited by:

    1. 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.
    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 & Victor Pontines, 2005. "Incidences of Speculative Attacks on Rupiah During The Pre- and Post-1997 Financial Crisis," Centre for International Economic Studies Working Papers 2005-04, University of Adelaide, Centre for International Economic Studies.
    4. Uma Ramakrishnan & Athanasios Vamvakidis, 2002. "Forecasting Inflation in Indonesia," IMF Working Papers 02/111, International Monetary Fund.

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