| Summary: | Indonesian economy did not predict would have hit heavily by the financial shock.
After the Asian Financial Crisis (AFC), the Government of Indonesia has devoted its
efforts to improve its capacity to cope with external shocks. In late 2008, the Global
Financial Crisis (GFC) was token place and affecting the world economy, including
Indonesia.
the author Conducting this research, tries to define the reasons an emerging
market economy like Indonesia has been vulnerable to the external shocks.
Researcher also hope can define the differences between the AFC and the GFC also
define the reasons two crises have had different effects on Indonesia economy. The
author has employed qualitative as well as a document research method. Major
macroeconomic indicators of Indonesia economy from 1990 to 2010 have been
analysed in this study. The researcher also elaborates those problems with connecting
with the Impossible Trinity Theory, which is faced by Indonesia, namely an
independent monetary policy, a stable exchange rate, and a freely capital mobility.
were already fragile in term of a
The findings show that in 1997/1998, Indonesia was hit by the AFC because the
Indonesian economic fundamentals widening and
prolonged current account deficit, a peg system of Rupiah exchange rates to the
USD, and an inadequate monitoring system to the large scale of capital flows. It
caused a dramatic depreciation of Rupiah, which is damage to its financial sector. By
contrast, the effects of GFC on Indonesian economy were relatively limited than
most countries. A slight capital withdrawal was happened. The rupiah exchange rate
experienced a moderate slowdown and maintained stable thereafter. In responding to
AFC, Bank Indonesia has implemented an extremely tight monetary policy by
raising the interest rate to the unusually high level. In term of fiscal policy, the
government controlled the budget deficit to reduce the current account deficit. On the
contrary, in responding to the GFC, BI has implemented a flexible monetary policy
by lowering the interest rate in order to support the investment and to ensure liquidity
enough in the financial system. In 2009, the government launched a fiscal stimulus
measure worth USD6.4 billion.
rior to AFC, the The author concludes that p monetary authority and Government
of Indonesia have ignored the Impossible Trinity Theory. They had tried to reach
three targets (not two targets) of the Impossible Trinity all at once in the same time,
which are maintaining exchange rate stability, keeping monetary policy independent,
and realizing free capital mobility. Therefore, those policy measures have failed and
Indonesian economy was hit hurtful by the AFC. After having lessons from the AFC,
Indonesia economic fundamentals have been consolidated. The monetary authority
made the appropriate policy measures to tighten the financial regulation and
supervision, to be more prudent to control the short term capital flows. After the
AFC, Indonesian monetary authority has abandoned a dollar-peg exchange rate
regime and move to a managed floating exchange rate system, has been more
prudent to control the capital flows out and into the country, and has independent
monetary policy to maintain the inflation targeting and the interest rates in order to
achieve price stability. Therefore, the effects of GFC to Indonesia economy were
relatively limited.
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