Impact of exchange rate volatility on Indonesia's trade performance in the 1990s

Abstract

Whether a real devaluation ultimately proves to be expansionary or contractionary depends on whether the boost given to the exportables sector offsets any possible output-depressing effects that may accompany the expenditure-switching policy. Failure of the exportables sector to adequately respond to the price incentives is a virtual guarantee that devaluation will be contractionary. This appears to have been the experience of Indonesia, the country worst hit by the crisis of 1997–1998. This paper explores whether the increased exchange rate variability of the Indonesian rupiah post 1997 may have been a cause for the country's poor export performance.