Saving the Rupiah with a Currency Board for Indonesia

Abstract:
In the aftermath of the Asian crisis, Indonesia was subject to various IMF norms, many of which have been criticized by a large number of economists and policy makers. Indonesia's exchange rate management has been in turmoil ever since. Post 14th August 1997, when the Rupiah was floated, it has depreciated severely against the dollar. A year after the crisis, in 1998, Indonesia's desire to set up a currency board generated considerable debate among economists in the international community. Both the US and the IMF were firmly against the country's desire to establish a currency board.

Even as of today, the Rupiah continues to slide against the dollar. In the face of this situation, the author attempts to examine the viability of a currency board in Indonesia. The author is of the view that Indonesia would benefit from a currency board, provided it is implemented in the correct manner, as has been defined in the paper. The Indonesian government of late seems to be doing a fairly decent job on both the fiscal and monetary front, as can be seen from the trends in inflation and fiscal deficit. However, the country's financial and legal frameworks are yet to mature, which can seriously restrain the development of a successful currency board.

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