Is Indonesia's current account balance optimal? Evidence from an intertemporal approach

Abstract

This study investigates whether Indonesia's Current Account (CA) balance is intertemporally solvent. We provide fresh evidence on Indonesia's CA deficit solvency by considering post-crisis period data and conducting sub-sample analysis. Our findings suggest that Indonesia's CA is not solvent. We notice evidence of excess lending prior to the global financial crisis of 2008 and excess borrowing in the postcrisis period. Policymakers need to focus on the composition of capital flows and management of volatile capital flows since discouraging foreign capital inflows may serve as a deterrent to economic growth.