The Weak Rupiah: Catching the tailwinds and avoiding the shoals

Abstract
The Indonesian rupiah depreciated 50 percent between July 2011 and January 2019. Blanchard et al. (2015) showed that capital outflows from emerging markets can reduce output by increasing the cost of financial intermediation and can increase output by increasing net exports. Regression results indicate that Indonesian banks are exposed to depreciations, but that exports are not stimulated by depreciations. The findings also indicate that Indonesia’s export price index is positively correlated with commodity prices and negatively correlated with manufactured goods prices. Exporting more manufactured goods would reduce Indonesia’s exposure to volatile commodity prices and allow depreciations to stimulate exports. This paper considers several steps that Indonesia could take to increase its manufacturing exports.