Gross Capital Inflows in Indonesia: Exploring Bonanzas and Sudden Stops

This paper examines episodes of capital bonanzas and sudden stops in Indonesia by utilising binary response models and several episode-identification approaches. Our identification suggests that whenever bonanza episodes occurred, capital sudden stop episodes followed in a more extended period. The estimations demonstrate that domestic factors are relatively dominant in determining the capital bonanzas, and the federal funds rate has a more significant impact on inducing the probability of capital sudden stops in Indonesia. We also found that Turkey and South Africa are the most contagious economies for Indonesia. This paper proposes some policy reforms to enhance the stability of capital inflows in Indonesia, including financial regulation and public finance policies such as a reverse Tobin tax and market-driven public debt rules.

Sudden Stops and Asset Purchase Programmes in the Euro Area

This paper analyses the incidence and severity of sudden stops in euro area countries before and after the introduction of the ECB’s asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e. total flows adjusted for EU and IMF loans and changes in TARGET2 balances. We document that sudden stop were more frequent and more severe in euro area countries compared to other OECD economies over the period 1999–2020. We find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals whereas there is no clear evidence of an adverse direct effect of being part of the euro area. Moreover, our econometric analysis suggests that the ECB asset purchase programmes have overall almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels.