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Indonesian Macro Policy through Two Crises

Listed author(s):
  • Prayudhi Azwar

    (Business School, University of Western Australia and Bank Indonesia)

  • Rod Tyers

    (Business School, University of Western Australia and Research School of Economics Australian National University, and Centre for Applied Macroeconomic Analysis (CAMA) Crawford School of Government ANU)

Indonesia’s open, developing economy fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Although the origins of both crises were external, during the AFC the coincidence of financial contagion with domestic political upheaval saw the Indonesian economy collapse. By contrast, during the decade-later GFC, when most nations slumped into recession the Indonesian economy slowed but did not recess, achieving real growth of 6.1% (2008) and 4.5% (2009) and recording one of the world’s best performances for the period. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the states of the global economy during the crises and the compositions of the external shocks in each case. This said, both shocks have capital flight elements and it is shown that the key policy responses include floating the exchange rate and fiscal expansions that are, where necessary, money financed. There is, nonetheless, evidence of evolution in Indonesian macroeconomic policy making between the crises that allowed its strong performance to be sustained.

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File URL: https://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2015/15.16%20Azwar,%20P.%20and%20Tyers,%20R.%20Indonesian%20Macro%20Policy%20through%20Two%20Crises.pdf
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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 15-16.

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Length: 38 pages
Date of creation: 2015
Handle: RePEc:uwa:wpaper:15-16
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  1. Gary B. Gorton, 2010. "Questions and Answers about the Financial Crisis," NBER Working Papers 15787, National Bureau of Economic Research, Inc.
  2. Rose, Andrew K., 2014. "Surprising similarities: Recent monetary regimes of small economies," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 5-27.
  3. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
  4. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, 09.
  5. Michael T. Rock, 2003. "The Politics of Development Policy and Development Policy Reform in New Order Indonesia," William Davidson Institute Working Papers Series 2003-632, William Davidson Institute at the University of Michigan.
  6. Arora, Vipin & Tyers, Rod, 2012. "Asset arbitrage and the price of oil," Economic Modelling, Elsevier, vol. 29(2), pages 142-150.
  7. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  8. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
  9. Kanit Sangsubhan & M. Chatib Basri, 2012. "Global Financial Crisis and ASEAN : Fiscal Policy Response in the Case of T hailand and I ndonesia," Asian Economic Policy Review, Japan Center for Economic Research, vol. 7(2), pages 248-269, December.
  10. Arianto A. Patunru & Tarsidin, 2012. "Recent Indonesian Economic Development and the Urgent Need to Remove Key Growth Obstacles," Asian Economic Papers, MIT Press, vol. 11(3), pages 57-77, October.
  11. Rod Tyers & Iain Bain & Yongxiang Bu, 2008. "China'S Equilibrium Real Exchange Rate: A Counterfactual Analysis," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 17-39, 02.
  12. Stephen Elias & Clare Noone, 2011. "The Growth and Development of the Indonesian Economy," RBA Bulletin, Reserve Bank of Australia, pages 33-43, December.
  13. Vipin Arora & Rod Tyers & Ying Zhang, 2014. "Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving," Economics Discussion / Working Papers 14-24, The University of Western Australia, Department of Economics.
  14. Lucy Rees & Rod Tyers, 2004. "On the Robustness of Short Run Gains from Trade Reform," CEPR Discussion Papers 474, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  15. Rod Tyers, 2012. "Japanese Economic Stagnation: Causes and Global Implications," The Economic Record, The Economic Society of Australia, vol. 88(283), pages 517-536, December.
  16. World Bank, 2003. "Indonesia : Maintaining Stability, Deepening Reforms," World Bank Other Operational Studies 14631, The World Bank.
  17. Rees, Lucy & Tyers, Rod, 2004. "Trade reform in the short run: China's WTO accession," Journal of Asian Economics, Elsevier, vol. 15(1), pages 1-31, February.
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