Determinants And Sustainability Of Indonesia's Current Account Balance

This paper examines dynamics of Indonesia's current account, factors determining the dynamics of the current account, and sustainability of the current account over the period of 1994-2008. The estimation results show a number of findings. First, the dynamics of actual current account in Indonesia was very much in line with the optimal current account based on intertemporal approach. In other words, the level and movement of actual current account were consistent with the level and movement of optimal current account. Second, consumption, investment, and real effective exchange rate significantly influenced the movements of Indonesia's current account. On the other hand, GDP growth, government budget and other external factors did not have a significant effect on the current account. Third, excessive consumption or investment, as well as the appreciation of the rupiah real exchange rate potentially result in unsustainable current account.