In 1965 the New Order Government took office in Indonesia, following years of severe economic turmoil. Since then the Indonesian economy has performed well, owing much to large oil export revenues and appropriate economic policies. This thesis presents a study of the Indonesian economy focused on three main themes: aid, the public sector and the real exchange rate (RER). In particular, we emphasise aid effectiveness on fiscal behaviour and on the RER. The thesis is organised in five chapters. Chapter 1 presents a synthetic overview of the main episodes in Indonesian economic history. Chapter 2 reviews theoretical and empirical issues on aid. Chapter 3 presents a dynamic model of government behaviour aimed at assessing aid’s impact on fiscal budget and on other real variables in the Indonesian economy. Following Heller’s seminal contribution (1975) and White’s new insights (1993), we insert the government sector into a simple macroeconomic framework: a constrained utility maximising framework which allows for feedback effects through higher income and dynamic linkages. The model is tested for the Indonesian case over the period 1968-93 and the estimated parameters are used to carry out a simulation exercise. We conclude with a positive assessment of aid giving, provided it is given in loans. Loans are found to encourage tax collection, public and private investment and consumption. Exchange rate management has played a significant role in Indonesia as an instrument to ensure competitiveness during and after the oil boom. Chapter 4 analyses the behaviour of the RER for the Indonesian rupiah and offers a theoretical and statistical background. Unit root testing has been extensively used to test for stationarity. We have consistently rejected the hypothesis of RER stationarity, except in those cases in which the full sample series have been used and/or two breaks have been allowed. Chapter 5 presents a modelling approach to RER determination. Following Edwards (1989), we present an econometric model of the RER and develop an extension of it in terms of the Error Correction Mechanism (ECM). Central to the analysis is the role of fundamentals, in particular aid and the price of oil, in determining the RER. The estimated parameters are then used to construct the equilibrium RER in order to study RER misalignment. Simulations are also carried out to investigate the impact of exogenous shocks and policy options on the RER. Results show that the Indonesian RER suffered from misalignment especially during the oil boom and until the early 1990’s. We also find that aid and the real price of oil do matter: both act as fundamental determinants of RER behaviour and contribute to RER stability, a finding confirmed by the simulation exercise. Interestingly, aid and government consumption appear to influence in differences and not in levels the RER.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:300719 |
| Date | January 1997 |
| Creators | Rubino, Chiara |
| Publisher | University of Warwick |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://wrap.warwick.ac.uk/108481/ |
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