Abstract
We estimate a small open economy structural vector autoregressive model for Indonesia that takes into account its susceptibility to significant cross‐border capital and financial flows. In anticipation of a recovering U.S. economy accompanied by monetary policy normalisation, global push factors are important drivers of capital flows and domestic economic performance for Indonesia. In the post‐1997 period, exchange rate stabilisation remains a key element of monetary policy formulation with the aim of anchoring investor confidence and maintaining inflation stability. Counterfactual simulations show that volatility in inflation and exchange rate increases when endogenous monetary policy responses are switched off.
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