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Three Essays on Financial Market Linkages and Central-Local Fiscal Arrangements in Archipelagic Indonesia

<p> This dissertation consists of three essays on monetary and fiscal policy in Indonesia. The first essay, Monetary Transmission Channel of Two Competing Central Banks, uses the Vector Autoregressive (VAR) methodology to investigate the relative influence of Indonesian and Singapore money market rates in the determination of retail interest rates across the regions in the many islands of Indonesia. The results indicate that the interest rates in several provinces that are located near Singapore (such as Batam Island) are jointly determined by the interest rates in both Indonesia and Singapore. The interest rate in most of the other provinces are determined only by the interest rate set by Bank Indonesia.</p><p> Examining the islands where the Singapore interest rate affects their retail interest rates, we do not see much evidence of capital flow between them and Singapore (e.g. there are no branches of Singapore banks on these islands). We suspect that offshoring activities by Singapore's firms, reflected by the high proportion of exports to Singapore, is an important factor in facilitating the pass-through of the interest rate in Singapore to these Indonesian provinces. Could monetary policy spillovers occur not just through capital movements but also through trade and offshoring activities?</p><p> The second essay, Offshoring and Interest Rate Linkages, is a theoretical essay that follows logically from the first essay. This essay is also motivated by the exodus of less productive firms from Singapore to Batam after the Singapore government had increased the minimum wage. This outcome is noteworthy because it contradicts the basic result of Ghironi and Melitz (2005) that only the most productive firms in a country engage in foreign activities, including offshoring production.</p><p> I model the firm's decision to offshore its production by extending the theoretical framework in Melitz (2003) to incorporate (a) heterogeneous firms, and (b) profit-maximizing banks. I find that offshoring increases with the difference between the domestic and foreign cost of capital and labor and also with country-specific productivity.</p><p> This extended model also allows me to suggest an interest rate linkage between Singapore and Batam in the absence of any capital movement. This is because the financing decision of the offshoring firm in Singapore determines the amount of its borrowing from Batam banks and hence affects the retail interest rate in Batam.</p><p> The third essay, Investigating the Impact of Administrative and Fiscal Decentralization in Indonesia on the Provision of Health, Education and Basic Infrastructure Services, looks at the welfare consequences of the drastic administrative and fiscal decentralization in the 1999-2004 period. I found 21 annual welfare indicators that were available for most of the regions and cities for the 1990-2013 period. I use the Chow test to test for structural breaks in the regression equations that characterize the evolution of each welfare indicator in every region/city. The estimations permit four key conclusions. </p><p> First, if there was a structural break in the evolution of the welfare indicators, it occurred in 2004 and not in 1999. This is not surprising because 1999 was the beginning of the decentralization process. Second, overly simple specifications will not find strong welfare effects. For example, many of the welfare indicators like literacy rate are bounded both in their minimum and maximum values, and so a linear specification would not find strong results unlike a specification that includes quadratic terms.</p><p> Third, some of the welfare indicators (e.g. literacy rate) did not show much improvement because they were defined for a low-level of welfare that were already satisfied when the decentralization program was enacted. Fourth, the welfare indicators that showed the most significant improvements involved construction, e.g. schools and roads. Possibly, local legislators not only recognized the big need for physical infrastructure but also that these were highly visible projects.</p>
Date23 March 2016
CreatorsPaundralingga, Angsoka Yorintha
PublisherUniversity of California, Davis
Detected LanguageEnglish

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