The shape of the Phillips curve: the case of Indonesia

It is recognized that the effectiveness of monetary policy in the control of inflation depends critically on the relationship between inflation and the output gap. During booms, inflation is highly sensitive to monetary influences, but during recessions this influence is considerably muted. However, econometric investigation of this phenomenon has mostly focussed on the developed economies. In this article, the shape of the Phillips curve is investigated for Indonesia. Evidence is found of significant nonlinearities in the inflation–output relationship for Indonesia and it is argued that this relationship is best modelled by the capacity-constraint (L-shape) model.     

Weather, investor irrationality and day-of-the-week anomaly: case of Indonesia

Finance is based on rational behavior assumption. Thus, the existence of day-of-weekend anomaly in the market can be the anti thesis of the assumption. Much research suggested the role of psychology as the explanation of this anomaly. However, it is rare to find a research investigating the relationship between psychology and day-of-week anomaly (DOWA). As one of the psychology factors is weather-induced mood, this research aims to investigate the relationship between weather cycle and DOWA. This paper used Indonesia average temperature level from 1999 up to 2009 for determining the proxy of moods; and found temperature level does not explain the market returns movements. Temperature level influences the DOWA implying the moods of investor establish the irrational behavior of the market. This result can be used as the explanation of irrationality behavior of investor on Monday. Further research is needed in term of investigating the relationship between psychology factors (need for cognition, heuristic bias, information ignorance, and other factors) and investor behavior.     

The mystery of the Chinese exchange rate regime: basket or no basket?

Economists have taken for granted the claim made by the Chinese government that the policy shift introduced in July 2005 constituted a change in the exchange rate regime from a fixed peg to a basket peg. We demonstrate that neither the stylized facts nor the empirical evidence support the proposition of a basket peg and suggest several reasons as to why China has not adopted this regime. The results could prove useful for identifying the Chinese exchange rate regime in the aftermath of the perceived policy shift following the August 2015 devaluation.     

Economic and environmental impacts of trade liberalization: The case of Indonesia

In recent years, there has been a growing interest in the environmental impacts of trade liberalization. This paper provides further discourse in this area with a study on Indonesia and its trade agreements with Japan (IJEPA) and ASEAN (AFTA). A static global CGE model, known as the Global Trade Analysis Project, was used to project the Indonesian economy to the year 2022, with and without tariff reforms agreed under the agreements. Environmental impacts are assessed using different pollution indicators—air, water and waste. The study suggests that Indonesia would grow rapidly over the period considered with a large deterioration in its environment. Following these, however, the agreements only have a marginal positive impact on Indonesia's output but with a noticeable increase in trade flows and signs of trade diversion. Overall AFTA has a greater impact on the Indonesian economy compared to IJEPA. Similarly, the impact of trade liberalization on the environment is marginal. On the whole, tariff reform is inducing air pollution and reducing water pollution. In conclusion, the study suggests that Indonesia's participation in the AFTA and IJEPA agreements is not likely to bring drastic changes to her economic and environmental performance.     

An indicator-based integrated assessment of ecosystem change and human-well-being: Selected case studies from Indonesia, China and Japan

The paper highlights the findings of a study from selected ecosystems in Indonesia, China and Japan. The study sought to trace changes to productive resources of ecosystems over a period of 50 years; and trace the dependence of well-being of local populations on the ecosystems for the same time period. Data was collected from land-use maps, records and participatory rapid/rural appraisal (PRA) surveys in multistakeholder forums. To illustrate the changes, an indicator-based assessment framework was developed that integrates data from biophysical and socio-economic parameters. We observed that the approach (1) provides a better representation of the preferences of different stakeholders of ecosystem services, (2) fosters validation of data between the different stakeholders and (3) enables a communication and planning process among the stakeholders to sustainably utilize and manage their ecosystems. The use of spatial maps validates the relevance and utility of diachronic observations of communities and other stakeholders directly dependent on ecosystems. At the same time, they can be used to strengthen local planning processes for the development of services in the ecosystem. Such research thereby also acts as a catalyst to a social process of coordinated action to address local issues of global relevance.     

Payments for environmental services as an alternative to logging under weak property rights: The case of Indonesia

Decentralization reforms in Indonesia have led to local communities negotiating logging agreements with timber companies for relatively low financial payoffs and at high environmental cost. This paper analyzes the potential of payments for environmental services (PES) to provide an alternative to logging for these communities and to induce forest conservation. We apply a game-theoretical model of community-firm interactions that explicitly considers two stylized conditions present in the Indonesian context: (i) community rights to the forest remain weak even after decentralization, and (ii) the presence of logging companies interested in the commercial exploitation of the forest. Intuition may suggest that PES design should focus on those communities with the lowest expected payments from logging deals. However, we show that these communities may not be able to enforce a PES agreement, i.e., they may not be able to prevent logging activities by timber companies. Moreover, some communities would conserve the forest anyway; in these cases PES would not lead to additional environmental gains. Most important, the introduction of PES may increase a community's expected payoff from a logging agreement. A failure to consider this endogeneity in expected payoffs could lead to communities opting for logging agreements despite PES, simply allowing communities to negotiate better logging deals. Our results indicate that PES design is a complex task, and that the costs of an effective PES system could potentially be much higher than expected from observing current logging fees. Using data collected in Indonesia on actual logging fees received by communities, we illustrate how the theoretical results could be used in empirical analysis to guide PES design. Our results are likely to be useful in other cases where local people make resource use decisions but have weak property rights over these resources, and where external commercial forces are present. The results highlight the importance of understanding the details of the local context in order to design PES programs appropriately.     

The Persistence of Income Shocks: Evidence from Rural Indonesia

This paper estimates the persistence of transient income shocks to farm households in rural Indonesia. Persistence is defined as the elasticity of a household's 1997 household per capita income with respect to its 1993 per capita income, controlling for time‐invariant characteristics of the household. Local rainfall levels are used as an exogenous source of transitory variation in 1993 income. Four main conclusions emerge. First, roughly 30% of household income shocks remain after four years. Second, the persistence of negative and positive shocks is approximately equal; if anything, positive shocks last longer. Third, neither positive nor negative income shocks disproportionately affect poor households. Finally, measurement error in income and unobserved household heterogeneity are important sources of bias. These findings cast doubt on common arguments advocating public intervention to stabilize or redistribute income, and suggest that anti‐poverty policy should address more permanent causes of household poverty.     

How Inequality Affects Trust in Institutions: Evidence from Indonesia

Trust is an important ingredient to improve economic performance and people's welfare by alleviating market failures caused by imperfect information, costly enforcement, or coordination failures. Using the World Values Survey 2018, we estimate the impact of village and district levels inequality on trust in institutions in Indonesia. We find that higher village level inequality has a negative effect only on trust in strangers, while higher district level inequality reduces trust in television, the press, the central government, the courts, and the police. The implication points to the importance of keeping inequality at the aggregate level in check to maintain people's trust in social, political and state institutions.     

Foreign investment regulation and firm productivity: Granular evidence from Indonesia

When regulating foreign direct investment (FDI), countries often face a trade-off between pursuing national policy interests and suffering efficiency losses due to FDI restrictions. We demonstrate the presence of this trade-off in the case of a protectionist FDI policy in Indonesia. Using a yearly census of Indonesian manufacturing firms from 2000 to 2015, we link product-level changes in binding FDI regulation due to major regulatory tightening to changes in firm-level productivity. Controlling for an extensive set of fixed effects as well as potential political economy drivers of regulation, we show that a tightening of the regulatory environment was successful in reducing foreign capital reliance among regulated firms, and led to increases in FDI among non-regulated firms producing the same product. Despite compensating increases in domestic capital, regulated firms experienced relative productivity losses. This points towards either a less efficient allocation of domestic capital or a general inferiority of domestic capital as compared to foreign investments.     

Corruption and the costs of redistribution: Micro evidence from Indonesia

This paper examines the degree to which the corruption in developing countries may impair the ability of governments to redistribute wealth among their citizens. Specifically, I examine a large anti-poverty program in Indonesia that distributed subsidized rice to poor households. I estimate the extent of corruption in the program by comparing administrative data on the amount of rice distributed with survey data on the amount actually received by households. The central estimates suggest that, on average, at least 18% of the rice appears to have disappeared. Ethnically heterogeneous and sparsely populated areas are more likely to be missing rice. Using conservative assumptions for the marginal cost of public funds, I estimate that the welfare losses from this corruption may have been large enough to offset the potential welfare gains from the redistributive intent of the program. These findings suggest that corruption may impose substantial limitations on developing countries' redistributive efforts, and may help explain the low level of transfer programs in developing countries.     

Non-core liabilities and interest rate pass-through: bank-level evidence from Indonesia

The policy importance of non-core liabilities (bank liabilities other than equity and retail deposits) has risen to prominence in recent years with a number of studies highlighting it as a useful indicator of financial procyclicality and vulnerability. In this paper, we look at non-core liabilities in relation to its role in the transmission of monetary policy, particularly by examining how the interest rate channel of monetary policy is affected by non-deposit liabilities. We analyse this issue in the context of an emerging economy experience of Indonesia, which in recent years, has seen an increased reliance of its banking sector on non-core funding. Our investigation employs available bank-level data on non-core liabilities and lending rates in Indonesia over the period October 2011 to July 2016. We find that including non-core liabilities in the estimation has an effect, relative to the baseline, of stronger overall and immediate pass-through, albeit with a more sluggish adjustment towards the correction of disequilibrium in the next period. The overall effect is that non-core liabilities make the duration longer for the monetary policy rate to transmit to bank lending rates in Indonesia.     

International Knowledge Spillovers to Developing Countries: The Case of Indonesia

The successful industrialization and catch up of countries in the East Asian region gave rise to an important debate concerning the role played by technological learning and knowledge creation. This paper seeks to examine this issue for Indonesia, a second‐tier newly industrializing country. It focuses on the relative importance of learning from imported inputs vis‐à‐vis other factors influencing productivity in manufacturing. The concept of learning is operationalized drawing on the literature on technology spillovers on the one hand, and the literature on catch up à la Abramovitz, on the other. Our results indicate that knowledge spillovers have become significant contributors to labor productivity growth after the liberalization of the Indonesian economy.     

Identification of a basket peg: the model specification controversy

A controversy has been triggered by the Chinese exchange rate regime shift from a single currency peg to an alleged basket peg. The controversy is about the specification of the model used to represent the basket as three models have been used: levels, log levels and first log differences. It is suggested that one way to confirm the validity or otherwise of a model is to use data on the special drawing rights exchange rate since the currency weights are known. The results show that the estimated weights are almost identical no matter which model and which numeraire is used. However, nonnested model selection criteria show that the best model is that written in levels, simply because this is what is used in practice by central banks adopting basket pegs.     

Cutting the costs of attrition: Results from the Indonesia Family Life Survey

Attrition is the Achilles heel of longitudinal surveys. Drawing on our experience in the Indonesia Family Life Survey (IFLS), we describe survey design and field strategies that contributed to minimizing attrition over four waves of the survey. The data are used to illustrate the selectivity of respondents who attrit from the survey and, also the selectivity of respondents who move from the place they were interviewed at baseline and are subsequently interviewed in a new location. The results provide insights into the nature of selection that will arise in studies that fail to track and interview movers. Attrition, and types of attrition, are related in complex ways to a broad array of characteristics measured at baseline. In addition, the evidence suggests attrition may be related to characteristics that are not observed in our baseline. Integrating IFLS with data from a Survey of Surveyors, we describe characteristics of both the interviewers and the interview that predict attrition in later waves. These characteristics point to possible strategies that may reduce levels of attrition and may also reduce the impact of attrition on the interpretation of behavioral models estimated with longitudinal data.     

Fiscal decentralisation,local institutions and public good provision: evidence from Indonesia

Using data from the Indonesian Family Life Surveys, we study the impact of fiscal decentralisation in Indonesia on local public spending across communities characterised by different types of informal and formal institutions. Our results provide new evidence that fiscal decentralisation led to a significant increase in community spending on social infrastructure (health and education) in communities which observed strict adherence to customary laws and had a tradition of local democracy. We argue that investment in transport and communication facilitates exchange with outsiders and improves the outside options of community members, thus making it more difficult to sustain intra-community cooperation. Consequently, communities which enjoy a high level of cooperation in collective activities benefit less from investing in transport and communication and are more inclined to invest in social infrastructure.     

R&D,productivity, and exports: Plant-level evidence from Indonesia

This study examines the relation between productivity and exports in Indonesian manufacturing firms by taking account the endogenous choice of R&D. We first examine the determinants of R&D activity and find that exporting activity contributes positively to plants' R&D activity, while multinational corporate do not have a higher R&D propensity. The simultaneous estimates on the interrelation of R&D, productivity, and export show that R&D has a positive impact on both productivity and exports, suggesting the importance of R&D to Indonesian economic growth. It suggests also a two-way causality between productivity and exports, implying the coexistence of self-selection and learning-by-exporting effects in Indonesian manufacturing sector.     

Asymmetric volatility of stock returns during the Asian crisis: Evidence from Indonesia

This paper investigates the conditional volatility in stock returns in Indonesia over the period covered by the Asian crisis. Rolling regression parameter estimates from three asymmetric volatility models suggested that all parameters, including those capturing asymmetric response, were time-varying. The precise pattern of adjustment was sensitive to model selection. Nevertheless, increases in asymmetric response patterns appear to coincide with the very large exchange rate devaluations in the rupiah over this period and were followed by more general symmetric short-term volatility in the post crisis period. Estimates from a smooth transition volatility model indicated both sign and size asymmetries during the crisis period.     

Equity,externalities and energy subsidies The case of kerosine in Indonesia

This paper examines two arguments used to justify the subsidy provided kerosine, the primary commercial fuel of Indonesian households. One argument holds that the subsidy reduces deforestation externalities resulting from wood gathering. Econometric analysis of a large cross-section of households finds that firewood/kerosene substitution is very limited in Java, where the deforestation problem is most severe, so that kerosene subsidy is not an effective means of alleviating the problem. The second argument holds that social equity requires the subsidization of ‘basic needs’ such as kerosene. It is found that the kerosene subsidy disproportionately benefits urban and wealthier households.     

Agglomeration Economies and Productivity Growth in Manufacturing Industry: Empirical Evidence from Indonesia

This study examines the effect of agglomeration economies on productivity growth in Indonesian manufacturing industries during the first decade of this century. Productivity growth is measured at the firm level using the Färe‐Primont Productivity Index. Each firm's productivity growth is then regressed against a set of firm and industry characteristics, including three measures of agglomeration representing the effects of specialisation, diversity and competition. The results show evidence of a positive specialisation effect and a negative diversity effect for aggregate manufacturing and sub‐sectors. Furthermore, there are mixed effects across industries, suggesting that Porter's competition externalities stimulate firm productivity growth under some conditions but not others.