The weak rupiah: catching the tailwinds and avoiding the shoals.

The Indonesian rupiah depreciated 50% between July 2011 and February 2020. Blanchard et al. (Are capital inflows expansionary or contractionary? Theory, policy implications, and some evidence. NBER Working Papers 21619, National Bureau of Economic Research, Cambridge, MA, 2015) showed that capital outflows from emerging markets can reduce output by increasing the cost of financial intermediation and can increase output by increasing net exports. Regression results indicate that Indonesian banks are exposed to depreciations, but that exports are not stimulated by depreciations. The findings also indicate that Indonesia's export price index is positively correlated with commodity prices and negatively correlated with manufactured goods prices. Exporting more manufactures would reduce Indonesia's exposure to volatile commodity prices and allow depreciations to stimulate exports. This paper considers several steps that Indonesia could take to increase its manufacturing exports.