QUARTERLY ANALYSIS I - 2011

The Board of Governors Meeting (Rapat Dewan Gubernur/RDG) of Bank Indonesia on 12 April 2011 has decided to maintain the BI rate by 6.75%. This decision does not change the direction of Bank Indonesia»s monetary policy which tends to be strict in an effort to control the inflationary pressures that are still high, amid the government efforts to reduce inflationary pressure from volatile foods group. The Board of Governors considered that the strengthening of the rupiah so far can reduce these inflationary pressures, particularly from the rising price of international commodities (imported inflation). In addition, to minimize the negative impact of short-term foreign capital flows on monetary stability and financial system, the Board of Governors also has decided to replace the one-month holding period on SBI to six-month holding period, which shall take effect on May 13, 2011. Looking ahead, Bank Indonesia assessed that the possibility of the BI rate level adjustment is still open to dampen the incoming inflationary pressures. Bank Indonesia believed that the implementation of monetary and macro-prudential policy mix, supported also by the strengthened coordination of government policy, will be able to maintain the macroeconomic stability and bring inflation to the target, which are 5% ± 1% in 2011 and 4.5% ± 1% in 2011...

ANALYSIS OF THE IMPACT OF MACROECONOMIC POLICIES ON TEXTILE INDUSTRY AND ITS PRODUCTS IN INDONESIA
by Iwan Hermawan

Abstract

Textile and textile's product play an important role in the Indonesian economy. During the last five years, however, the share of these industries and commodities to gross domestic product tend to decrease. The objectives of this study are to analyze factors affecting Indonesian textile and textile's product, and the prospect of Indonesian textile and textile's product in the future. Results of the study show that domestic textile production was affected by world cotton price and wage rate, while the domestic garment production was affected by wage rate in the garment sector. Indonesia's textile export to world market was influenced by domestic textile price, and Indonesia»s export garment was influenced by Exchange rate (Rp/US$). Indonesian textile demand was affected by wage rate while domestic garment demand was affected by income per capita of Indonesia. In general, the prospect of Indonesian textile and textile's product seems not too good. In fact, Indonesian textile and textile's product had depended on high import cotton, investment, and exchange rate.

JEL Classification : C53, E60, F43, and F4.
Keyword: export, open economy, forecasting, simulation, textile and textile»s product.

THE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL
by Rizki E. Wimanda

Abstract

This paper investigates the impact of exchange rate depreciation and money growth to the CPI inflation in Indonesia. Using monthly data from 1980:1 to 2008:12, our econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effect of exchange rate depreciation on inflation. However the threshold value for exchange rate depreciation is found at 8.4%, and there is no significant difference between the coefficient both below and above the threshold value. Meanwhile, two threshold values are found for money growth, i.e. 7.1% and 9.8%, and they are statistically different. The impact on inflation is high when money grows by up to 7.1%, it is moderate when money grows by 7.1% to 9.8%, and it is low when money grows by above 9.8%.

JEL Classification: C22; E31; E51.
Keywords: Inflation, Threshold Effect; Indonesia

THE SUSTAINABILITY OF STATE BUDGET IN DEBT REPAYMENT
by Haryo Kuncoro

Abstract

This paper is designed to analyze the sustainability of the central government budget in Indonesia over the period of 1999-2009. First, we explore the theoretical background of the fiscal sustainability. Second, we develop a model to capture some factors determining the fiscal sustainability. Unlike the previous studies, we use both domestic debt and foreign debt to assess the fiscal solvency. Finally, we estimate it empirically. Based on the quarterly data analysis, we concluded that the government budget is unsustainable. This is associated with domestic debt rather than foreign debt. They imply that the central government should manage the debts carefully including re-profile, re-schedule, and re-structure them in order to spread the excess burden in the future. Also, the fiscal risks should be calculated comprehensively in order to maintain solvency.

Key words: Domestic debt, Foreign debt, Fiscal sustainability, Primary balance
JEL Classification: E62, H63

MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA
by Akhis R. Hutabarat

Abstract

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.

JEL Classification: F41; E52; D58
Keywords: Exchange rate, Balance of Payment, Monetary transmission and policy, Dynamic General Equilibrium.