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Spillovers of United States and People’s Republic of China Shocks on Small Open Economies: The Case of Indonesia

Author

Listed:
  • Harahap, Berry

    (Asian Development Bank Institute)

  • Bary, Pakasa

    (Asian Development Bank Institute)

  • Panjaitan, Linda

    (Asian Development Bank Institute)

  • Satyanugroho, Redianto

    (Asian Development Bank Institute)

Abstract

This paper examines the impact of certain external shocks originating from the US and the PRC on Indonesia as a small open economy. The spillover effects of tapering off, an interest rate hike, exchange rate devaluation, and real gross domestic product (GDP) are analyzed. Two versions of the global vector autoregression model are employed, which covers 33 countries and considers both financial and trade relations among countries. Spillover assessments are conducted through impulse responses with 1,000 bootstrap replications, and compared to the responses of peer countries. The results suggest that the main risk for Indonesia’s real GDP is a shock to the PRC's real GDP, while a US interest rate hike is the greatest risk to Indonesia’s exchange rate depreciation in the short term, especially compared to the US tapering off. Moreover, the dominant transmission channel of US monetary tightening is through finance, dampening economic growth in small open economies.

Suggested Citation

  • Harahap, Berry & Bary, Pakasa & Panjaitan, Linda & Satyanugroho, Redianto, 2016. "Spillovers of United States and People’s Republic of China Shocks on Small Open Economies: The Case of Indonesia," ADBI Working Papers 616, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0616
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    References listed on IDEAS

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    Cited by:

    1. Faryna, Oleksandr & Simola, Heli, 2018. "The transmission of international shocks to CIS economies: A Global VAR approach," BOFIT Discussion Papers 17/2018, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Faryna, Oleksandr & Simola, Heli, 2021. "The transmission of international shocks to CIS economies: A global VAR approach," Economic Systems, Elsevier, vol. 45(2).
    3. Bayront Y. Rumondor & Pakasa Bary, 2018. "Capital Flows And Risk-Taking Behaviour," Working Papers WP/23/2018, Bank Indonesia.
    4. Nguyen, Dat Thanh & Phan, Dinh Hoang Bach & Anglingkusumo, Reza & Sasongko, Aryo, 2021. "US government shutdowns and Indonesian stock market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    5. Berry A. Harahap & Pakasa Bary & Anggita Cinditya M. Kusuma, 2020. "The Determinants of Indonesia’s Business Cycle," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 215-235.
    6. repec:zbw:bofitp:2018_017 is not listed on IDEAS
    7. Oleksandr Faryna & Heli Simola, 2018. "The Transmission of International Shocks to CIS Economies: A Global VAR Approach," Working Papers 04/2018, National Bank of Ukraine.
    8. Bayront Yudit Rumondor & Pakasa Bary, 2020. "Capital Flows and Bank Risk-Taking Behavior: Evidence From Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 33-53.

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    More about this item

    Keywords

    Spillovers; small open economies; tapering off; interest rate hike; exchange rate devaluation; real GDP; US; PRC; Indonesia;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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