Prospective External Shocks and Indonesian Economic Performance

Prayudhi Azwar and Rodney Tyers
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Prayudhi Azwar: Business School, University of Western Australia and Bank Indonesia

No 16-19, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: The post-GFC era sees slower global growth, unusually combined with lower investment financing costs, a substantial Chinese slowdown and with the eventual prospect of a US-led re-tightening of global financial markets. For Indonesia in the medium term, these developments imply a slowing of export growth and a temporary surge in net inward investment incentives. These changes are examined here using a numerical macro model. The results suggest that recent fiscal reform is long run beneficial and that it will moderate the negative effects of expectations linked to the eventual financial tightening. Indeed, results depend importantly on whether expectations are formed on the short run effects or the prospective tightening. Expectations retard growth in either case. Depending on magnitudes, the prospect of financial tightening may be preferable to nearer term financial easing that is combined with comparatively unattractive export moderation.

Pages: 33 pages
Date: 2016
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