And What Happens to Indonesian Economy

So you want to know what the impact of current global financial meltdown on Indonesian economy is? Dede Basri of Diskusi Ekonomi gives you some of the answers in this readable economic (mind you, economic) writing.

To get a better grasp for the center of his argument, you need to understand at least the straightforward national income accounting and balance of payment identities (ask your economist friend to tell you this concept over a coffee, if you don't).

On what makes BI raise interest rates, he wrote that the step is justifiable as an attempt to stem the domestic demand for import (while export declining) at the time of low capital inflow. The failure to do so might deplete the foreign reserves and lead to deeper Rupiah depreciation.

It is also to give signal that in the medium term, the BI still concerns with and runs its main job -keeping the inflation low. In this respect, Ross McLeod of ANU's Indonesia Project wrote why monetary expansionary policies, including lower interest rate, might not be desirable:

(But) base money has already been growing far too rapidly to be consistent with the current target level of about 5% inflation, which has risen from about 6% in the middle of 2007 to more than 12% in September this year.