Malaysia Policy

Post-crisis Monetary and Exchange Rate Policies

in Indonesia, Malaysia and Thailand

George Fane(, Australian National University

July 2005

ABSTRACT

This paper describes and analyses the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.

1. Introduction

The monetary and exchange rate responses of Indonesia, Thailand and Malaysia to the dramatic speculative attacks on their currencies in 1997 were very different. Having sought and obtained the help of the IMF, Indonesia and Thailand abandoned their long standing policies of pegging their currencies to baskets that were overwhelmingly dominated by the dollar and announced the adoption of floating exchange rate regimes and restrictive monetary policies based on targets for restraining the rate of growth of base money (M0).

In the first nine months of the crisis, Bank Indonesia (BI) completely failed to meet the monetary targets announced in the Indonesian government’s letters of intent to the IMF. This happened as a result of last resort lending to weak banks that was far in excess...