Indonesian macro policy through two crises

Abstract

Indonesia fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Financial contagion, policy misdirection, panic and political upheaval saw the AFC bring economic collapse. The decade-later GFC, however, brought real growth of 6.1% (2008) and 4.5% (2009), amongst the world's best performances at the time. 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 shocks and intervening changes in economic structure. Critically, IMF conditionality during the AFC required unsustainably contractionary reforms. Capital flight elements were present in both crises, however, and exchange rate depreciations and money-financed fiscal expansions are shown to have contributed significantly to resolution.