Indonesian Macro Policy through Two Crises

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

No 15-16, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: 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.

Pages: 38 pages
Date: 2015
New Economics Papers: this item is included in nep-cba, nep-mac and nep-sea
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Working Paper: Indonesian Macro Policy through Two Crises (2015)
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