Abstract
This research examines the cause of portfolio flows in Indonesia and the effect of portfolio flows to the Indonesian economy based on monetary policy approach. By analyze the interactions among portfolio investment, global and domestic macroeconomy, and financial variables by employing a structural vector autoregression model, this study finds: 1) that both global and domestic factors play the role in driving the portfolio flows in Indonesia; 2) the portfolio flows play the role in driving the domestic financial market, by the order starts from asset prices, followed by exchange rate and lastly credit; 3) the portfolio flows play a role in driving the Indonesian economic growth. The percentage of the effect of portfolio is relatively large compared to the other variables, but in total, the percentage of portfolio flows in driving the economic growth is quite small. Nonetheless, the impulse response function result shows that the shock in portfolio flow can affect the economic growth.
Highlights
This research examines the cause of portfolio flows in Indonesia and the effect of portfolio flows to the Indonesian economy based on monetary policy approach
This study focuses on surveys related to the dichotomy of determinants of foreign capital flows based on differences in economic growth proxied by GDP in the form of logarithms, differences in liquidity
This research gives us three insight: first, both global variables and domestic variables play a role in affecting the Indonesian portfolio inflow
Summary
This research examines the cause of portfolio flows in Indonesia and the effect of portfolio flows to the Indonesian economy based on monetary policy approach. Capital flow is an inevitable phenomenon as the impact of globalization This implicating that events on the world is felt to the domestic economy. Koepke (2015) stated that portfolio investments can affect and be affected by the country money market condition. This statement in line with Baek (2006) that found the characteristic of portfolio investment is hotmoney that is very volatile due to shorth-term characteristic and very depended on global sentiment. In Emerging market economies, portfolio investment can be seen through asset prices, exchange rate, and bank credit (Tillman (2013), Lane & McQuade (2014) and Rey (2015))
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