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

Berry Harahap, Pakasa Bary, Linda Panjaitan and Redianto Satyanugroho
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Berry Harahap: Asian Development Bank Institute
Linda Panjaitan: Asian Development Bank Institute
Redianto Satyanugroho: Asian Development Bank Institute

No 616, ADBI Working Papers from 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.

Keywords: Spillovers; small open economies; tapering off; interest rate hike; exchange rate devaluation; real GDP; US; PRC; Indonesia (search for similar items in EconPapers)
JEL-codes: C32 E17 F47 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-12-31
New Economics Papers: this item is included in nep-cna, nep-mac, nep-opm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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