What Would Have Happened in Indonesia if Different Economic Policies Had Been Implemented When the Crisis Started?

2002 ◽  
Vol 1 (2) ◽  
pp. 75-103 ◽  
Author(s):  
Iwan J. Azis
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Income Distribution ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
Net Worth ◽  
High Interest ◽  
Lower Interest Rate ◽  
Rate Policy ◽  
Business Confidence

Many models of the Indonesian economy cannot generate the large collapses in output and exchange rate experienced in 1997–98. The model in this paper was able to replicate the actual events by adding several new links. One new link is between the depreciation of the exchange rate and the deterioration of the balance sheets of firms, which are in turn linked to decline in investment. Another new link is between decline in output and decline in business confidence, leading to possible increased capital outflow and exchange rate collapse. The IMF's high interest rate policy did not succeed in strengthening the rupiah because it inflicted such severe damage on the net worth of Indonesian firms that it caused capital flight to accelerate, turning what was originally just a financial crisis into a major recession. Two alternative counterfactual policy packages are examined: (1) a lower interest rate policy and (2) a lower interest rate policy combined with a partial write-down of the external debt. The model indicates that the country's macroeconomic conditions would have fared better if the prolonged high interest rate policy had been avoided. The results suggest that early actions should have been undertaken to address the mounting private foreign debts. The delayed handling of private debts had prevented other policies from working effectively. The two counterfactual policies also would have resulted in a more favorable outcome for income distribution and poverty incidence. The model revealed a close correlation between worsening (improving) income distribution and increasing (declining) interest rates.

Consequences of a High Interest Rate Policy in the Process of Disinflation. The Case of Poland

1998 ◽  
Vol 9 (1) ◽  
pp. 15-31 ◽  
Author(s):  
Alojzy Z. Nowak ◽  
Kazimierz Ryć ◽  
Jerzy Żyżński
Keyword(s):  
Interest Rate ◽  
Banking Sector ◽  
Banking System ◽  
Research Programme ◽  
Open Market ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
The Real ◽  
High Interest ◽  
Rate Policy

The aim of the article is to analyse the consequences of a high interest rate policy pursued in Poland since 1990 in the process of disinflation. The interest rate was the main instrument of monetary policy in a situation when the economy lacked a money market on which the money supply could be influenced directly by open market operations. The application of a high interest rate had many unfavourable consequences both in the real sphere and in the financial sphere. The most important of these consequences in the real sphere was that it forced self-financing on the part of enterprises, the ineffective allocation of resources, delays in carrying out investments, the cyclicity of demand; the effects in the financial sphere mainly concern the banking sector, where the assets of the banking system become distorted, while for enterprises the most important consequences result from the high cost of credit, which increases costs and reduced the competitiveness of enterprises dependent on credit. The authors analyse these consequences and formulate hypotheses and a research programme for testing them.

Some Reflections on the Relation Between Finance and Distribution in the 1980s

1992 ◽  
Author(s):  
J. A. Kregel
Keyword(s):  
Interest Rate ◽  
Technological Change ◽  
Financial Structure ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
High Interest ◽  
Savings And Loan ◽  
Rate Policy ◽  
Functional Distribution

Growth and technological change have created difficulties in linking changes in individual and functional distribution. The problem is complicated by changes in financial structure in the 1980s; making it more difficult to trace the effect on distribution of such events is the increase in government indebtedness, high interest rate policy, or the collapse of savings and loan banks. This paper tries to outline these difficulties and is a first step in assessing how these factors affect individual distribution.

scholarly journals Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis

2006 ◽  
Vol 2006 ◽  
pp. 1-9 ◽  
Author(s):  
Tim Brailsford ◽  
Jack H. W. Penm ◽  
Chin Diew Lai
Keyword(s):  
Interest Rate ◽  
Financial Crisis ◽  
Exchange Rates ◽  
Interest Rates ◽  
Asian Financial Crisis ◽  
The Philippines ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
High Interest ◽  
Rate Policy

One of the most controversial issues in the aftermath of the Asian financial crisis has been the appropriate response of monetary policy to a sharp decline in the value of some currencies. In this paper, we empirically examine the effects on Asian exchange rates of sharply higher interest rates during the Asian financial crisis. Taking account of the currency contagion effect, our results indicate that sharply higher interest rates helped to support the exchange rates of South Korea, the Philippines, and Thailand. For Malaysia, no significant causal relation is found from the rate of interest to exchange rates, as the authorities in Malaysia did not actively adopt a high interest rate policy to defend the currency.

Downfall of the Regulatory System and Triumph of the Market

2020 ◽  
pp. 230-250
Author(s):  
Einar Lie
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Western Europe ◽  
Regulatory System ◽  
Exchange Rate Policy ◽  
Oil Price ◽  
Interest Rate Policy ◽  
Institutional Legitimacy ◽  
Rate Policy ◽  
The Interest Rate

This chapter discusses how, in the 1970s and 1980s, Norges Bank began to develop instruments with a view to steering economic policy under freer market conditions. However, governments of changing political hues were unwilling to let go of the low interest rate. The oil price fall in 1986 brought an abrupt change in interest rate and credit policy. The government’s tightening actions included the introduction of a more binding fixed exchange rate policy. The frequent recourse to corrective devaluations was to be a thing of the past. Hence, there was a justification for using the interest rate as an ongoing instrument to stabilize the exchange rate. This task fell to Norges Bank. The transition to an independent, active interest rate policy on the part of the central bank was abrupt and came as a surprise. Barely a year before the collapse of the oil price, the Storting had passed a law that made Norges Bank one of the least autonomous central banks in all of western Europe. Ultimately, it was the external situation, and in no sense an increase in government’s and the public’s recognition of the bank and its institutional legitimacy, that restored greater operative autonomy to Norges Bank.

Depleting net worth of Russian banks: Changes in banks’ risk-taking and the interest rate policy of the Bank of Russia

2019 ◽  
pp. 30-55
Author(s):  
Mikhail E. Mamonov
Keyword(s):  
Interest Rate ◽  
Risk Taking ◽  
Banking Sector ◽  
Banking System ◽  
Bank Failures ◽  
Total Size ◽  
Interest Rate Policy ◽  
Net Worth ◽  
Rate Policy ◽  
The Interest Rate

Despite achieving success in the tight prudential regulation of the banking sector, the Bank of Russia (CB RF) continues to reveal new cases of negative net worth in banks. This paper investigates the influence of banks’ risk-taking and the interest rate policy of the CB RF on the depletion of net worth in Russian credit institutions during 2007—2017. The quartile regression approach is employed to examine the differences in net worth depletion of already failed banks; additionally, the Heckman selection approach is applied to analyze potential negative net worth that has not been revealed by the CB RF yet. The estimation results suggest that banks’ risk-taking matters: its increases are positively associated with the rises of the probability of bank failures and the size of negative net worth, conditional on failure. Ignoring of banks’ risktaking leads to a substantial upward bias in the estimates of the total size of negative net worth in the banking system — from 3.6 to 5.3 trillion rubles, or by 2% of the system’s total assets. Further, the interest rate policy of the CB RF has a risk-shifting effect: an increase of the key rate together with a rise of its volatility are associated with a further depletion of banks’ net worth. Finally, the paper shows that a joint increase in banks’ risk-taking and the key rate has a further negative effect on banks’ net worth.

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