English Version
I. INTRODUCTION
The debate over the appropriate role of exchange rate as a policy instrument for macroeconomic stabilization policies has gained renewed interests in recent years. In the international forum, for example, as a part for adjustment mechanism for correcting the current global economic imbalances, the US has continued to pressure for greater exchange rate flexibility to the Asian countries, especially China and Malaysia. The conjecture is that some Asian countries manage their exchange rate movements for supporting their external competitiveness, thereby prevent the adjustment mechanisms through which global economic imbalances would have some impacts on their exchange rates and domestic economic performances. Even though the debate both theoretical and empirical ground on the merits of this issue continues, the US manage to enforce this issue as an integral part of international concerted efforts for adjustment mechanism of current global economic imbalances in various international forum.
The debate over the appropriate role of exchange rate as a policy instrument for macroeconomic stabilization policies has gained renewed interests in recent years. In the international forum, for example, as a part for adjustment mechanism for correcting the current global economic imbalances, the US has continued to pressure for greater exchange rate flexibility to the Asian countries, especially China and Malaysia. The conjecture is that some Asian countries manage their exchange rate movements for supporting their external competitiveness, thereby prevent the adjustment mechanisms through which global economic imbalances would have some impacts on their exchange rates and domestic economic performances. Even though the debate both theoretical and empirical ground on the merits of this issue continues, the US manage to enforce this issue as an integral part of international concerted efforts for adjustment mechanism of current global economic imbalances in various international forum.
For Indonesia, the debate over the role of exchange rate in the economy continues to upsurge every time there is heightened pressure on the rupiah. For example, when rupiah depreciates and fluctuates heavily such as during the period of March to June of 2004 and from March to August of 2005, proposals for introducing capital control or even moving to pegged or managed floating exchange rate system reemerge as short-cut measures for taming the instability of rupiah. Conversely, when the rupiah strengthens such as in the recent months of end 2005 and early 2006, worries about its impacts on export competitiveness of the country come to the fore. In general, it seems that the complete understanding of the nature and implications of exchange rate movements under free floating regime that Indonesia adopts since August 1997 has not been share broadly.
On both theoretical and empirical perspectives, our understanding of exchange rates and their impacts on macroeconomic stability has also been put under tests in the recent years for several reasons. With structural changes and advances in the financial markets, exchange rate movements become more volatile and proven to be very difficult to model and, especially, to forecast. There is evidence that the role of exchange rate for macroeconomic adjustments, especially for promoting current account balances, has dissipated as a country becomes more open and advances in its international trade and investments. There are also evidences that relationship between exchange rates, inflation and real activity has changed; in particular, with the apparent smaller pass-through of exchange rate changes into domestic prices. In addition, currency crises and changes in exchange rate regimes in emerging markets have brought to the fore the implications of foreign exchange balance-sheet mismatches for the link between the exchange rate and real economic activity.
In terms of the implications of exchange rates for macroeconomic and monetary policy, a number of questions are particularly relevant. Can exchange rate be used as an instrument for promoting export competitiveness, and thereby as a vehicle for correcting current account»s imbalances? With greater openness in international trade and investments, how exchange rates response and are affected by capital flows and what their implications on the role of exchange rate for macroeconomic stability? What is the appropriate response of monetary policy to exchange rate changes, i.e. should it stabilize the exchange rate or should it respond only to the extent that exchange rate changes affect forecasts of inflation and output? What the implications of the impossible trinity between exchange rate stability, free capital mobility, and monetary policy independence to the practice of monetary policy making?
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On both theoretical and empirical perspectives, our understanding of exchange rates and their impacts on macroeconomic stability has also been put under tests in the recent years for several reasons. With structural changes and advances in the financial markets, exchange rate movements become more volatile and proven to be very difficult to model and, especially, to forecast. There is evidence that the role of exchange rate for macroeconomic adjustments, especially for promoting current account balances, has dissipated as a country becomes more open and advances in its international trade and investments. There are also evidences that relationship between exchange rates, inflation and real activity has changed; in particular, with the apparent smaller pass-through of exchange rate changes into domestic prices. In addition, currency crises and changes in exchange rate regimes in emerging markets have brought to the fore the implications of foreign exchange balance-sheet mismatches for the link between the exchange rate and real economic activity.
In terms of the implications of exchange rates for macroeconomic and monetary policy, a number of questions are particularly relevant. Can exchange rate be used as an instrument for promoting export competitiveness, and thereby as a vehicle for correcting current account»s imbalances? With greater openness in international trade and investments, how exchange rates response and are affected by capital flows and what their implications on the role of exchange rate for macroeconomic stability? What is the appropriate response of monetary policy to exchange rate changes, i.e. should it stabilize the exchange rate or should it respond only to the extent that exchange rate changes affect forecasts of inflation and output? What the implications of the impossible trinity between exchange rate stability, free capital mobility, and monetary policy independence to the practice of monetary policy making?
Journals for full download on the link below
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