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Jurnal Ekonomi & Bisnis Indonesia


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


Amri Anjas Asmara




    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 capital inflows are
    often associated with real exchange rate appreciation. 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 relationship.

     Controlling for relative outputs
    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 nvestment 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 coclusions.
    First, the problematic relationship between REER appreciations of capital
    inflows would be more moderate in which the authorities exercised
    countercyclical fiscal. It means that greater fiscal restraint would also help
    ease pressure for real appreciation of the exchange rate. Second, aggressive
    sterilization could be the first line of defense against REER appreciation during
    surge of capital inflows.


    Vol 27, Nomor 01, Tahun 2012


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