Amri Anjas Asmara(1*)

(1) Fixed Income and Derivative Trading Division Indonesia Stock Exchange (IDX)
(*) Corresponding Author


This paper examines the implications of, and policy responses to the transfer problem phenomenon, which is the interaction between surging capital inflows and real exchange rate. In particular, this paper identifies three episodes of large net private capital inflow to Indonesia during 1995 - 2010. Episodes of large capital inflows are often associated with real exchange rate appreciations. In turn, these conditions could undermine economic competitiveness in terms of price.
This paper adopts theoretical framework that leads to test the long-run co-movements of real exchange rates and capital inflows. This long run relationship is modeled on the
cointegration framework. The Full-Modified Ordinary Least Square (FMOLS) is used to provide optimal estimates of cointegration regressions, dealing with endogeneity and
serial correlation effect in the regressors that result from the existence of the cointegrating relationships.
Controlling for relative output levels, degree of openness, and the terms of trade, time series empirical evidence presented evidence supporting the existence of a significant
transfer problem in Indonesia. Moreover, using disaggregated measure of inflows, this paper finds that portfolio investment has the most significant impact on REER appreciation
in Indonesia.
A comprehensive assessment of various policy responses to the transfer problem leads to two major conclusions. First, the problematic relationship between REER apreciation
and capital inflows would be more moderate in which the authorities exercised countercyclical fiscal. It means that greater fiscal restraint would also help ease pressures for real appreciation of the exchange rate. Second, aggressive sterilization could be the first line of defense against REER apreciation during surge of capital inflows.

Keywords: Transfer Problem, Real Effective Exchange Rate, Capital Inflows, Cointegration, Full-Modified Ordinary Least Squared (FMOLS)

Full Text:



Article Metrics

Abstract views : 799 | views : 672 | views : 802


  • There are currently no refbacks.

Copyright (c) 2012 Journal of Indonesian Economy and Business

License URL:

Journal of Indonesian Economy and Business


Editorial Team
Focus and Scope
Peer Review Process
Publication Ethics
Screening for Plagiarism


Author Guidelines
Submission Guidelines
Online Submissions
Copyright Notice
Privacy Statement
Author Fees


Author Pack
Submission Form & Manuscript Template



Reviewer Guidelines
Reviewer Acknowledgement



General Search
Author index
Title index



The Journal of Indonesian Economy and Business (print ISSN 2085-8272; online ISSN 2338-5847) is published by the Faculty of Economics and Business Universitas Gadjah Mada, Indonesia. The content of this website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License

© 2019 Journal of Indonesian Economy and Business 
 Visitor Statistics