Trilemma and macroeconomic policies under different financial structures in Indonesia

Yuniarto Hadiwibowo () and Masaaki Komatsu

Journal of Asian Economics, 2011, vol. 22, issue 4, 302-310

Abstract: This paper examines the macroeconomic "trilemma" and international capital flows under different financial structures in Indonesia. The paper also reviews uncovered interest parity and uncovered equity return parity conditions. We divide the period of analysis into two sub-periods: before and after the Asian financial crisis of 1997/1998. The exchange rate was managed before the Asian financial crisis and floated afterwards. We find that the domestic interest rate followed the movement of the benchmark rate before the crisis. This fact signifies limited monetary policy freedom. However, exchange rate movement seems to be influenced by factors other than interest rates during the whole period. Interestingly, we find that international capital flows did not respond as expected to changes in the domestic interest rate after the crisis. The paper concludes with considerations on the efficacy of monetary and fiscal policy.

Keywords: Trilemma; Mundell-Fleming; Uncovered; interest; parity; Monetary; policy; Fiscal; policy (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:22:y:2011:i:4:p:302-310

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