The disparity on per capita income is evident between Java and outside Java in Indonesia. This paper confirms this evidence using σ-convergence statistic. Furthermore, this paper identify the determinant of per capita income by adopting the Solow growth model and β-convergence model. The result emphasize confirms the availability of basic infrastructure including electricity, road and sea transport are a necessary condition to gain high and sustainable growth. In addition, the result shows the existence of β-convergence, which represents the pace of regions with lower per capita income catching up other regions with higher per capita income, in Indonesia with 1,75% speed of convergence; or equivalent with half-life of 41.14 years. Furthermore, the openness will increase the region’s productivity due to higher technology spillover.     JEL Classification:

We build DSGE model for small open economy with financial friction in the form of collateral constrain on banking sector, designed for Indonesian economy. The constructed model is capable to simulate the monetary policy (Bank Indonesia rate) and macroprudential policy (reserve requirement, capital adequacy ratio – CAR, and loan to value – LTV). By internalizing banking sector into the model, this model also enable us to simulate the impact of any shock originated from banking sector.      

Perekonomian nasional menunjukkan pertumbuhan yang lebih rendah dari triwulan I 2013 sebagai dampak dari perlambatan ekonomi global dan kenaikan inflasi di dalam negeri. Setelah mencatat pertumbuhan 6,0% (yoy) pada triwulan I 2013, ekonomi Indonesia tumbuh melambat menjadi 5,8% (yoy) pada triwulan II-2013. Ekspor, meskipun telah tumbuh positif, masih belum cukup kuat menopang pertumbuhan ekonomi akibat masih lemahnya permintaan ekonomi global. Ekspor yang belum kuat serta melemahnya daya beli akibat inflasi yang meningkat berpengaruh kepada perlambatan konsumsi rumah tangga dan juga investasi non-bangunan.....

Pertumbuhan ekonomi triwulan III 2013 melambat sesuai dengan prakiraan sebelumnya. Perekonomian Indonesia pada triwulan III 2013 tumbuh 5,6% (yoy), lebih lambat dibandingkan dengan triwulan II 2013 sebesar 5,8% (yoy). Perlambatan ekonomi terutama tercatat pada sisi investasi dengan menurunnya investasi bangunan dan rendahnya pertumbuhan investasi non bangunan. Kinerja ekspor secara riil mengalami perbaikan meskipun diikuti dengan impor total yang meningkat. Sementara itu, konsumsi baik konsumsi rumah tangga maupun konsumsi pemerintah menunjukkan peningkatan....

This paper analyze the impact of foreign policy (the Fed) on Indonesia’s monetary economy, focusing on the attention is also to the fund rate. An empirical model of VAR (Vector Auto Regression) is developed to capture the impact of increase in fund rate to Indonesia’s monetary sector. The system of equations covers central bank policy rate, lending rate, inflation, real effective rate (REER), and the output growth. The result shows that the increase of fund rate tended to push Bank Indonesia to increase his policy rate, hence the lending rate. On the other side, positive shock of foreign fund rate lower inflation and output growth, and appreciate the Real Effective Exchange Rate with lag. Keyword: monetary policy, lending rate, inflation, exchange rate.JEL Classification: E52, F41

This paper analyzes the role of currency hedging on non-financial firm’s performance. Most firms on the sample have anticipated the currency mismatch risk by balancing the ratio of foreign debt to their asset  fenominated in foreign currency. Using panel estimation, we find that there is no evidence of currency hedging activities to affect capital and performance of firms. The result underlines the low intensity of currency hedging activities due to lack of incentives, which is inline with the low derivative transaction within the underdeveloped foreign currency market. This finding may raise a concern since currently the development of foreign liabilities for non-financial firmsin Indonesia is increasing in significant level, as well as the increase risk of domestic currency depreciation. For these reasons, Bank Indonesia should take proactive policies to deepen foreign currency market as well as derivative market by providing a more comprehensive and market friendly hedging instruments to banks and non-financial firms, while keep promoting the benefit of currency hedging. Keywords: Hedging, derivative market, foreign liability. JEL Classification: F31, G31

This paper employs disaggregated data of inflation combined with Factor Augmented Vector Auto Regression (FAVAR) to explore the price behaviour in Indonesia. The main finding of this analysis is that price behaviour in Indonesia exhibits heterogeneity. It is evident not only in terms of the magnitude, but also in the direction and the speed of adjustment to the new equilibrium in response to interest rate shock. Price volatility is mainly related to sector specific shocks instead of macroeconomic shocks. Another finding is, the price puzzle weakens once ITF is adopted. Keywords: price disaggregation, inflation, FAVAR, price puzzle.JEL classification: C32, E31, E52

This paper analyzes the impact of entry ports reduction on horticultural production on the economic activities, prices and also toward social welfare by using Computable General Equilibrium (CGE) model. The simulation shows higher import restriction on horticultural products will not only increase the factor income (at current value), but will also increase the composite prices. The higher effect of the latter leads to social welfare reduction, but on the other hand favors the agriculture household types. This finding shows import restriction on horticulture product serves as income redistribution policy instrument. With regard to this, the monetary authority should take the issue into account, especially in order to anticipate the effect of composite prices increase, which could lead to the need of extra efforts in managing price stability. Keywords: import reduction; prices, inflation, CGE; social welfare; income distribution.JEL Classification: E25, E27

Asian and European crises were witnesses of banks’ vulnerable due to market risks. The Basel Committee requires an internal risk assessment applying Value at Risk (VaR). However, a replacement of VaR with Expected Shortfall (ES) has been suggested recently due to an excessive losses produced by banks which are beyond VaR estimations. This paper studied the risk of Indonesian banks applying a historical expected shortfall. We used JIBOR (overnight) from 2009 – 2012 as a proxy of market risk. The assessment of a historical expected shortfall of the net position of 27 banks accounts for October 2012 showed that state owned banks placed among the five highest value of each component (net position) in the balance sheet, namely placement to Bank Indonesia, interbank placement, spot and derivatives claims, securities, and loans. It means that the state owned banks had the highest risk and were the most aggressive among Indonesian banks. It might be due to carrying some of the government’s program, such as small enterprise loans.     Keywords: expected shortfall, value at risk, banks, risk.     JEL Classification: D81, G210

This paper analyzed the regional characteristic and the output growth. Using panel data analysis on 33 provinces in Indonesia, the result shows that the labor growth and net export positively affect the output growth. Surprisingly, the inflation and human capital were found to be insignificant on output growth. Keyword : economic growth, panel data, regional characteristicsJEL Classification: O47, C23, R11

Perekonomian Indonesia pada triwulan IV 2014 menunjukkan bahwa stabilitas makroekonomi dan sistem keuangan yang terjaga. Kondisi ini tercermin pada defisit transaksi berjalan yang menurun dan inflasi yang terkendali. Sementara itu, ekonomi domestik tumbuh meningkat dibandingkan dengan triwulan sebelumnya, meskipun secara keseluruhan 2014 melambat. Kinerja transaksi berjalan triwulan IV 2014 membaik terutama didukung oleh surplus neraca perdagangan nonmigas dan menurunnya defisit neraca perdagangan migas. Di sisi lain, stabilitas sistem keuangan tetap solid ditopang oleh ketahanan sistem perbankan dan relatif terjaganya kinerja pasar keuangan

The aim of this study is to measure the efficiency of Islamic Bank in Indonesia, to analyze the factors that affect the level of efficiency which is known as Two-Stage Data Envelopment Analysis method and to propose measurement of Bank Soundness with modified CAMELS. The objects of this study are 10 (ten) Islamic Bank (BUS) in Indonesia which analyzes from the second Quarter of 2010 until the fourth Quarter of 2012. There are 2 (two) methods which are used in this study, namely non-parametric method of Data Envelopment Analysis (DEA) on the first stage and Tobit model on the second stage. In addition, this study will illustrate the formulation of the financial factors of CAELS instead of CAMEL by integrating the results of efficiency level measurement using DEA in CAELS formulation. Overall, the results, show that the efficiency level of Islamic banks in Indonesia during the time period in this study, have not yet reach the optimum level of efficiency. In addition, modification of CAELS for the bank performance level method by integrating the result of DEA shows that the modification of CAELS could be more accurate in describing the bank performance level, particularly for Islamic Bank in Indonesia. Keywords: Efficiency, Data Envelopment Analysis (DEA), Tobit Model, CAELS + DEAJEL Classification: C02, C14, C54,G21

The link between decentralization and inflation as one of the key aspects of macro economic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, previous study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF).   Keywords : Decentralization, Regional Inflation Convergence, Regional InstitutionJEL Classification: E31, H73, R12

This paper examines the influence of profitability, growth opportunity, and capital structure on firm value. We apply Structural Equation Model (SEM) on 150 listed companies on the Indonesia Stock Exchange during 2006 to 2010. The result shows that profitability, growth opportunity and capital structure positively and significanctly affect the company’s value. Secondly, the capital structure intervene the effect of growth profitability on company’s value, but not for profitability. Keywords: profitability, growth opportunitiy, capital structure, firm value, SEM.JEL Classification: C51, G32, L25

Perekonomian Indonesia pada triwulan II 2014 menunjukkan bahwa proses penyesuaian struktur perekonomian ke arah yang lebih seimbang masih terus berlangsung dengan ditopang oleh stabilitas makro ekonomi yang tetap terjaga. Kondisi ini tercermin dari permintaan domestik yang terkendali dan inflasi yang berada dalam tren menurun, meskipun defisit transaksi berjalan meningkat antara lain karena pola musiman triwulan II 2014. Walaupun mengalami peningkatan defisit dibanding triwulan sebelumnya akibat pola musiman, kinerja transaksi berjalan triwulan II 2014 lebih baik dibandingkan dengan periode yang sama tahun sebelumnya. Sementara itu, stabilitas sistem keuangan masih solid ditopang oleh ketahanan sistem perbankan dan relatif terjaganya kinerja pasar keuangan. Di sisi lain, sistem pembayaran juga berjalan lancar dalam menopang perekonomian

This paper analyzes the presence of the threshold of the real rupiah exchange rate which influences the profitability of manufacturing industry in Indonesia. By using a non-dynamics panel data over medium and large scale companies during 2001-2009, we found the threshold of 82.4 for the real rupiah exchange rate (REER). The REER index ranging from 82.24 to 101.13 with the change value between -5.01% and 20.09% (yoy) is secure for the profitability of Indonesian manufacturing industry. This paper also conform the significant affect of Total Factor Productivity on firm’s profitability.  Keywords: Profitability, Manufacturing industry, exchange rate JEL classification: F1, D21, L6

This paper measures the insolvency risk of bank in Indonesia. We apply Merton model to identify the probability of defaul tover 30 banks during the period of 2002-2013. This paper also identify role of financial linkage a cross banks on transmitting from one bank to another; which enable us to assess if the risk is systemic or not. The results showed the larger total asset of the bank, the larger they contribute to systemic risk. Keywords : Conditional Value at Risk; Probability of Default; systemic risk and financial linkages;Value at Risk. JEL Classification: D81, G21, G33

Global financial crisis which began in the US in the latter part of 2008 hit a lot of countries in both trade and finance. In trade aspect, the crisis spread widely; in Indonesia, the total export value in 2009 dropped to 14,3%. Therefore, the economy of China, tightly linked with Asian countries including Indonesia, which rapidly rose before the crisis but slowed after it should be monitored as this condition, could indirectly hold down Indonesia’s GDP. Applying RAS method to update Asian IO data, this research has attempted to describe the trade structure of Asian countries in 2010. Also, it implemented a simulation of the impact of US and China’s GDP decline and US exports on Indonesia’s GDP, both at aggregate and sector levels. The result of the mapping shows that Indonesia is getting more dependent on China. Generally, the link between Indonesia’s exported products and global production chain is weak. Indonesia’s export commodities which are mostly of intermediate goods have low contribution towards value added. Moreover, the result of the simulation shows that 1% decrease in China’s GDP has greater impact on Indonesia’s GDP (0,14%) than that of the US (0,05%) and EU (0,07%) though with similar point.  Keyword: Trade Interactions, Input Output Model JEL Classification : F16, R15

This paper studies the effects of foreign capital flows toward the exchange rate of rupiah both in total and across types of capital investment. This paper also analyzes the thresholds of current account deficit which significantly affect the rate of Rupiah. The estimation shows the capital outflow affect the rate of Rupiah to depreciate and is larger than the appreciation pressure of capital inflow (except when invested in Certificate of Bank Indonesia, SBI). Furthermore, the rate of Rupiah is more sensitive on government bond (SUN) than stock or SBI. The yield of this government bond largely affects the probability of the capital reversal. Related to the current account, the estimation shows that after exceeds the threshold of USD980 million monthly deficit or about 2% of GDP, the exchange rate will depreciate by 12.7% (m-o-m) with the lag effect of 4 months.  Keywords: Capital flows, exchange rate, current account deficit, threshold. JEL Classification: F31, F32

A Measuring the risk associated with interest rates is important since it is beneficial in taking measures before negative effects can take place in an economy. We obtain a risk measure for interest rates by fitting the generalized Pareto distribution (GPD) to positive extreme day-to-day changes of the interest rate, using data from the Istanbul Stock Exchange (ISE) Second Hand Bond Market, namely Government Bond interest rate closing quotations, for the time period 2001 through 2009. Although the use of the GPD in the context of absolute interest rates is well  ocumented in literature, our approach is different insofar and contributes to the literature as changes in interest rates constitute the target of our analysis, reflecting the idea that risk arises from abrupt changes in interest rate rather than in interest rate levels themselves. Our study clearly shows that the GPD, when applied to interest rate changes, provides a good tool for interest rate risk assessment, and permit a period-specific risk evaluation.  Keyword: Interest rate risk; covered interest parity; Turkey; generalized Pareto distribution JEL Classification: G1; C1