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Rupiah depreciation: Money talks, orders don't

Money talks in the market. Orders or moral suasion usually don’t.

Yopie Hidayat (The Jakarta Post)
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Jakarta
Wed, August 8, 2018

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Rupiah depreciation: Money talks, orders don't For some time, the rupiah has been under pressure from the tightening of US monetary policy. (Antara/Puspa Perwitasari)

D

ecision makers around the world must accept the bitter reality that their options are indeed severely limited when conducting monetary policies in an open-market economy. These alternatives are even restricted if the economy in question is suffering from a chronic balance of payments problems, such as Indonesia.

Economists call this problem the impossible trinity, or trilemma. A country can only have two out of the following three options: a free capital movement, an independent monetary policy and a fixed exchange rate. It cannot have them all. 

During the New Order era of 1967-1998, Indonesia always opted for free capital movement, using this principle as an almost sacred formula. Free movement of capital has since been the crux of Indonesia’s economic policy. Hence, there are two kinds of policy mixes available.

First, Indonesia can have a fixed exchange rate but lose its monetary policy independence. Second, Indonesia can maintain an independent monetary policy but let the exchange rate float freely, serving as a “shock absorber”. 

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