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Exchange Rate Policy and Foreign Exchange Reserves Management in Indonesia in the Context of East Asian Monetary Regionalism



The first part of this paper examines the behaviour of rupiah over the last seven years (1996 - 2002) to ascertain whether in fact there is specific evidence of a return to de facto US dollar peg in Indonesia. To preview the main conclusion, we find evidence to suggest that this has been the case, hence justifying the need for accumulation of reserves by the Indonesian authorities. The next question that arises naturally from this is whether there is any way in which the liquidity yield from holding reserves may be generated without the need for Indonesia to continue to accumulate them. This is where a regional reserve pooling arrangement becomes relevant. But how might one judge the potential size of benefits of reserve pooling? This is the focus of the second part of the paper.

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