The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.


The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Ashok Bhundia

The 1997–98 economic crisis marked a turning point for Indonesia after three decades of impressive growth. IMF research has examined the depth of the economic crisis, the channels through which it was propagated, and the quality of the IMF’s policy advice to Indonesian authorities. It has also focused on the design of structural reforms and progress in implementing them, including reforms in the banking sector, and on the challenges posed by pressures for greater regional autonomy.

Indonesia’s growth performance over the three decades preceding the Asian economic crisis was impressive. GDP per capita increased more than fourfold, and poverty fell substantially. In contrast with some previous studies, Sarel (1997) finds that over 1978–96, growth was driven primarily by relatively strong improvements in total factor productivity rather than by the accumulation of factor inputs.

Indonesia was among the countries hardest hit by the economic crisis, with a decline in output of 13 percent in 1998. A statistical analysis by Cerra and Saxena (2003) finds that all the crisis-affected Asian countries, including Indonesia, suffered a permanent decline in the level of output. The decline was partly explained by a fall in investment caused by the reversal in private capital flows that began in 1997 (Greene, 2002). Financial contagion may also have played a role. Baig and Goldfajn (1999) find evidence of an increase in the co-movement of financial markets across the crisis-affected countries, including Indonesia.

Weaknesses in the banking system help explain the severity and depth of the crisis, which began with the devaluation of the rupiah in July 1997. Many banks had weak capital positions, partly because of connected lending, poor supervision, and lack of enforcement of prudential regulations. Using data up to 1994, Montgomery (1997) had already identified several priority areas for prudential reforms before the onset of the crisis. Pangestu and Habir (2002) trace the origins of the deterioration in the overall health of the banking system to poor sequencing of policy reforms. In particular, they find that financial liberalization in Indonesia was not preceded by strengthening supervisory institutions and prudential regulations, and was carried out in an environment of weak governance. The costs of resolving the banking crisis were extremely high, in part because of protracted delays in policy reforms designed to address weaknesses (Enoch and others, 2001). These delays, in turn, reflected the volatility of Indonesia’s political environment, which was more turbulent than in the other crisis countries.

Much progress has since been made in restructuring the banking system, but as noted by Pangestu and Habir (2002), a number of issues remain. These include pressing ahead with further consolidation of the sector, divestment of state ownership, strengthening of prudential regulation, and completion of a bank-wide financial safety net.

The role of the IMF, including its programs and policy advice, has been criticized by various observers. One criticism has regarded the handling of the bank closure program at the outset of the systemic banking crisis. Enoch (2000) draws on four episodes of bank closures between November 1997 and March 1999 to offer some “do’s and don’ts” about closing banks in the midst of a systemic crisis. The IMF was also criticized for advising the authorities to raise interest rates sharply to support the external value of the currency. However, Tanner (2000) and Basurto and Ghosh (2001), using different approaches to control for endogeneity, both find that tighter monetary policy during the crisis did not exacerbate but rather eased the pressure on the exchange rate, as was intended. In a preliminary assessment of the IMF-supported program in Indonesia (and other countries), Lane and others (1999) report that monetary programs were initially too loose (and fiscal targets were too tight). But they note that since nobody predicted the severity of the crisis, including private sector analysts, adjustments to programs were made as circumstances evolved and the true extent of the crisis became apparent.

Along with political changes in the wake of the crisis, there has been strong momentum for increased regional autonomy, including passage of decentralization laws in 2001. The implications for fiscal policy, including the allocation of oil revenues, have been profound. Ahmad and Mottu (2003) posit that political economy arguments may provide a rationale for the oil revenue sharing between the central government and oil producing regions that was provided for in the decentralization laws. However, they also note that such revenue sharing arrangements are fraught with risks, including the fact that oil revenues can be volatile and that subnational governments, with narrower tax bases, are less able to adjust to such shocks. More generally, Ahmad and Leruth (2000) study how decentralization in Indonesia could constrain the effectiveness of central government policy. They provide evidence that compensation mechanisms for the poor (such as rice subsidies) are open to “capture” by local governments that have very different incentives than does the central government. Hence, they argue that policies need to be crafted carefully so that they are incentive compatible, especially since monitoring mechanisms are weak.


  • Ahmad, Ehtisham, and Eric Mottu, 2003, “Oil Revenue Assignments: Country Experiences and Issues,” IMF Working Paper 02/03.

  • Ahmad, Ehtisham, and Luc Leruth, 2000, “Indonesia: Implementing National Policies in a Decentralized Context: Special Purpose Programs to Protect the Poor,” IMF Working Paper 00/102.

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  • Baig, Taimur, and Ilan Goldfajn, 1999, “Financial Market Contagion in the Asian Crisis,” IMF Staff Papers, Vol. 46, No. 2, pp. 16795.

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  • Basurto, Gabriela, and Atish Ghosh, 2001 “The Interest Rate-Exchange Rate Nexus in Currency Crises,” IMF Staff Papers, Vol. 47, Special Issue, pp. 99120.

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  • Cerra, Valerie, and Sweta C. Saxena, 2003, “Did Output Recover from the Asian Crisis,” IMF Working Paper 03/48.

  • Enoch, Charles, 2000, “Interventions in Banks During Banking Crises: The Experience of Indonesia,” IMF Policy Discussion Paper No. 00/2.

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  • Enoch, Charles, Barbara Baldwin, Olivier Frecaut, and Arto Kovanen, 2001, “Indonesia: Anatomy of a Banking Crisis —Two Years Living Dangerously, 1997–99,” IMF Working Paper 01/52.

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  • Greene, Joshua, 2002, “The Output Decline in Asian Crisis Countries: Investment Aspects,” IMF Working Paper 02/25.

  • Lane, Timothy, Atish Ghosh, Javier Hamann, Steven Phillips, Marianne Schultze-Ghattas, and Tsidi Tsikata, 1999, IMF-Supported Programs in Indonesia, Korea, and Thailand, IMF Occasional Paper No. 178.

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  • Montgomery, John, 1997, “The Indonesian Financial System — Its Contribution to Economic Performance, and Key Policy Issues,” IMF Working Paper 97/45.

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  • Pangestu, Marie, and Manggi Habir, 2002, “The Boom, Bust, and Restructuring of the Indonesian Banks,” IMF Working Paper 02/66.

  • Sarel, Michael, 1997, “Growth and Productivity in ASEAN Countries,” IMF Working Paper 97/97.

  • Tanner, Evan, 2000, “Exchange Market Pressure and Monetary Policy: Asia and Latin America in the 1990s,” IMF Staff Papers, Vol. 47, No. 3, pp. 31133.

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Visiting Scholars, January–March 2005

Adeola Adenikinju; University of Ibadan, Nigeria; 2/22/05–4/1/05

Reena Aggarwal; Georgetown University; 1/3/05–1/21/05

Joshua Aizenman; University of California, Santa Cruz; 3/28/05–4/1/05

Lloyd Amaghionyeodiwe; University of Ibadan, Nigeria; 2/28/05–4/8/05

Michael Atingi-Ego; Central Bank of Uganda; 3/21/05–4/29/05

Ian Babetskii; Czech National Bank; 2/22/05–3/25/05

Sami Bennaceur; IHEC Carthage, Tunisia; 2/28/05–4/1/05

Michael Bordo; Rutgers University; 1/24/05–1/28/05; 3/14/05–3/18/05

Fernando Broner; Universitat Pompeu Fabra, Spain; 3/21/05–4/1/05

Anetta Caplanova; University of Economics, Bratislava, Slovakia; 3/14/05–4/15/05

Luis Cespedes; Banco Central de Chile; 3/21/05–4/1/05

Gouranga Gopal Das; Hanyang University, South Korea; 1/24/05–2/25/05

Allan Drazen; University of Maryland; 2/24/05–3/31/05

Jean Gabszewicz; Université Catholique de Louvain, Louvain la Neuve, Belgium; 1/10/05–1/14/05

Alejandro Gaytan; Banco de Mexico; 3/15/05–3/25/05

Sunghyun Henry Kim; Tufts University; 3/24/05–3/25/05

Kenneth Kuttner; Oberlin College; 2/25/05–4/29/05

Pamela Labadie; George Washington University; 3/14/05–3/18/05

Philip Lane; Trinity College Dublin;1/24/05–1/28/05; 2/7/05–2/11/05

Jong-Wha Lee; Korea University; 1/10/05–2/4/05

Xuepeng Liu; Syracuse University; 3/21/05–3/25/05

Jane Mariara; University of Nairobi, Kenya; 3/21/05–4/29/05

Enrique Mendoza; University of Maryland; 3/21/05–3/25/05

Alessandro Missale; Università di Milano; 3/30/05–4/8/05

Dirk Muir; Norwegian Central Bank; 1/28/05–2/18/05

Amrut Nashikkar; New York University; 3/28/05–3/28/05

Tatsuyoshi Okimoto; University of California, San Diego; 2/22/05–2/28/05

Christopher Otrok; University of Virginia; 1/6/05–1/7/05; 3/7/05–3/11/05

Arvind Panagariya; University of Maryland; 3/10/05–3/16/05

David Parsley; Owen Graduate School, Vanderbilt University; 2/28/05–3/4/05

Joseph Pearlman; London Metropolitan University, U.K.; 2/28/05–3/4/05

Dani Rodrik; Harvard University; 3/17/05–3/18/05

Serdar Sayan; Bilkent University; 2/7/05–3/11/05

Rangarajan K. Sundaram; Stern University; 1/3/05–1/7/05; 3/28/05–3/28/05

Nathan Sussman; Hebrew University, Israel; 3/7/05–3/18/05

Phillip Swagel; American Enterprise Institute; 3/21/05–4/29/05

Guido Tabellini; IGIER - Università Bocconi, Italy; 3/8/05–3/10/05

Linda Tesar; University of Michigan; 1/4/05–1/30/05

Allan Timmermann; University of California, San Diego; 1/3/05–1/28/05

Tan Wang; University of British Columbia, Canada; 2/14/05–2/18/05

Randall Wright; University of Pennsylvania; 2/17/05–2/18/05

IMF Research Bulletin, June 2005
Author: International Monetary Fund. Research Dept.