Post-crisis monetary and exchange rate policies in Indonesia, Malaysia and Thailands

Abstract

This paper surveys the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.

Notes

¹The 30-day interest rate on SBI (Sertifikat BI, certificates of deposit at BI) peaked at 70.4% in August 1998 before falling to 35.5% in December 1998; by August 1999 it was down to 13.1% (CEIC Asia Database). Inflation fell rapidly and the exchange rate appreciated from Rp 15,000 to Rp 7,500/$ in just over three months (McLeod 2003: 305–6).

²In addition to Thailand, the countries to adopt inflation targeting include Australia, Brazil, Canada, Chile, the Czech Republic, South Korea, New Zealand and the United Kingdom.

³The rise in velocity in Malaysia can be explained, at least in part, by the reduction in statutory reserve requirements. Likewise, the fall of velocity in Indonesia in 2004 is associated with an increase in statutory reserve requirements in that year. The (modest) fall in velocity in Thailand does not have any equally simple explanation.

⁴In the absence of any other changes, an exchange rate fluctuation causes equal and opposite changes in NDA and NFA, leaving M0 unchanged. The reason for the change in the domestic currency value of NFA is obvious; the equal and opposite change in NDA arises because one of its negative components is the net wealth of the central bank in domestic currency, which is directly affected by capital gains, or losses, on NFA. For this reason, exchange rate fluctuations cause the charts to exaggerate the extent to which the central banks have actually sterilised NFA. Without knowing the composition of NFA between dollars, yen, euro and so forth, it is impossible to make accurate allowances for this effect.

⁵For example, the average rate of core inflation in the last quarter of 2004 is defined as the average of the rates of core inflation for October, November and December 2004, relative to the same months in 2003. Since the monthly increases were 0.6% in each case, the average core inflation rate for the quarter was also 0.6%.

⁶Before May 2001, the BOT's lending rate was set by the Monetary Policy Board. Other minor changes occurred at the same time as the change in the title from ‘Board’ to ‘Committee’.

⁷The rupiah weakened from Rp 8,661/$ in April 2004 to Rp 9,415/$ in June 2004 (CEIC Asia Database).

⁸SBI with six months to maturity were discontinued in 1999.

⁹BNM's total holding of Malaysian government securities is less than 0.1% of its total assets.

¹⁰This overnight collateralised lending by BNM to a bank with a small deficit at the end of the day is quite different from last-resort lending to a bank in real financial difficulty. Last-resort lending would be made at much higher rates through a different facility.

¹¹When the ringgit was initially pegged in September 1998, Malaysia's annual inflation was running at about 5.6% (month on 12 months earlier), and it took just under a year for the rate to fall below 2.5%. This lag in reducing inflation was presumably due to the gradual flow-through to non-traded prices of the large depreciation of the ringgit that had occurred in the year preceding September 1998.

¹²The relative merits of targeting base money and inflation have been debated in this journal by Grenville (2000a, 2000b) and Fane (2000a, 2000b).

Additional information

Notes on contributors

George Fane

I am grateful for help from officials of the central banks of Indonesia, Malaysia and Thailand. I have also received many helpful comments from Stephen Grenville, Lloyd Kenward and Stephen Marks. The opinions expressed and any remaining errors are of course my responsibility alone.