The Role of Monetary Policy in Comparative Advantage and Trade Balance of Capital-Intensive Industry in Indonesia
DOI:
https://doi.org/10.17059/2020-1-22Keywords:
capital-intensive industry, monetary policy, interest rates, inflation targeting, international trade, export, comparative advantage, trade balance, Indonesia, difference in differencesAbstract
This paper examines the influence of monetary policy on comparative advantage and trade balance of capital-intensive industries (technology-intensive industry and human capital-intensive industry). Ever since Indonesia implemented the Inflation Targeting Framework (ITF) in 2005, the average interest rates have been gradually declining, making capital more affordable. The Heckscher-Ohlin-Samuelson (HOS) model states that lower interest rates will improve comparative advantage and trade balance of capital-intensive industry. In our research we used annual export and import data for the period from 2000 to 2017, drawing on the three- digit Standard International Trade Classification (SITC) revision 2 from United Nations Commodity Trade Statistics Database (UN-COMTRADE). The study combines Revealed Symmetric Comparative Advantage (RSCA) and Trade Balance Index (TBI), used for analysing Product Mapping. Additionally, we applied the Difference in Differences (DD) model to measure the real impact of the ITF on capital-intensive industries choosing unskilled labour-intensive products as a control group. For analysing the effect of the ITF on probability of positive changes of comparative advantage and trade balance we used the Logit model. Based on product mappings, we cannot conclude that the situation for capital-intensive products is better in 2014 than in 2000, pre-ITF. However, the DD and the Logit model show that the ITF positively influences comparative advantage and trade balance of capital-intensive products and significantly impacts trade balance of unskilled labour-intensive products. The study concludes that the ITF have positive impact on comparative advantage and trade balance of capital-intensive industry in Indonesia.
References
Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy, 39, 195-214. North-Holland. DOI: 10.1016/0167-2231(93)90009-L
Woodford, M. (2001). The Taylor rule and optimal monetary policy. American Economic Review, 91(2), 232-237. DOI: 10.1257/aer.91.2.232
Utama, C. Miryam B. L. W. & Lim, C. (2017). The role of interest rates and provincial monetary aggregate in maintaining inflation in Indonesia. Buletin Ekonomi Moneter dan Perbankan, 19(3), 267-286. DOI: 10.21098/bemp.vl9i3.666.
MacDonald, R. & Nagayasu, J. (2000). The long-run relationship between real exchange rates and real interest rate differentials: A panel study. IMF staff papers, 47(1), 116-128. Retrieved from: https://www.imf.org/en/ Publications/WP/Issues/2016/12/30/The-Long-Run-Relationship-Between-Real-Exchange-Rates-and-Real-Interest-Rate-Differentials-A-2912 (Date of access: 11.03.2018).
Why the manufacturing sector still matters for growth and development in Indonesia. Policy Note. (2012). World Bank.
Bowen, H. P., Hollander, A. & Viaene, J.-M. (2001) Applied International Trade Analysis. United States of America: The University of Michigan Press, 143.
Ridhwan, M. M., De Groot, H. L., Nijkamp, P. & Rietveld, P. (2010). The impact of monetary policy on economic activity - evidence from a meta-analysis. Tinbergen Institute Discussion Paper No. 3. Retrieved from: https://papers.tinbergen. nl/10043.pdf (Date of access: 03.08.2016).
Barth III, M. J. & Ramey, V. A. (2001). The cost channel of monetary transmission. NBER Macroeconomics Annual 2001, 16, 199-256.
Jorgenson, D. W. (1963). Capital theory and investment behavior. American Economic Review, 53(2), 247-259. Retrieved from: https://www.nber.org/chapters/cl235.pdf (Date of access: 02.03.2018).
Grossman, G. M. & Helpman, E. (1990). Comparative Advantage and Long-Run Growth. The American Economic Review, 80(4), 796-815.
Rybczynski, T. M. (1955). Factor Endowment and Relative Commodity Prices. Economica, 22(88), 336-341. DOI: 10.2307/2551188.
Harrigan, J. (1995). Factor endowments and the international location of production: econometric evidence for the OECD, 1970-1985. Journal of International Economics, 39(1-2), 123-141. DOI: 10.1016/0022-1996(94)01361-U
Harrigan, J. & Zakrajsek, E. (2000). Factor supplies and specialization in the world economy. NBER Working Paper No. 7848. DOI: 10.3386/w7848.
Reeve, T. A. (2006). Factor endowments and industrial structure. Review of International Economics, 14(1), 30-53. DOI: 10.1 lll/j.1467-9396.2006.00559.x
Akay, G. H. & Dogan, C. (2013). The effect of labo r supply changes on output: empirical evidence from US industries. Journal of Productivity Analysis, 39(2), 123-130. DOI: 10.1007/slll23-012-0290-2.
Hanson, G. H. & Slaughter, M. J. (1999). The Rybczynnski theorem, factor-price equalization, and immigration: evidence from U.S States. NBER Working Paper No. 7074.
Bernstein, J. R. & Weinstein, D. R. (2002). Do endowments predict the location of production? Evidence from national and international data. Journal of International Economies, 56, 55-76. DOI: 10.3386/w6815.
Leontief, W. (1954). Domestic Production and Foreign Trade - The American Capital Position Reexamined. Economia Internazionale, 7(1 ), 9-45.
Bergin, P. R. & Corsetti, G. (2015). Beyond competitive devaluation: the monetary dimension of comparative advantage. Cambridge-INET Working Paper No. 16. DOI: 10.17863/CAM.5785.
Laursen, K. (1998). Revealed comparative advantage and the alternatives as measures of international specialization. Working paper Danish Research Unit for Industrial Dynamics (DRUID), No. 98-30. Retrieved from: https://wp.druid.dk/ wp/19980030.pdf (Date of access: 03.08.2016).
Lafay, G. (1992). The measurement of revealed comparative advantages. In: M. G. Dagenais, R A. Muet (Eds.), International Trade Modeling (pp. 209-234). London: Chapman & Hill.
Balassa, B. (1965). Trade liberalization and "revealed" comparative advantage. The Manchester School of Economics and Social Studies, 33(2), 99-123. DOI: 10.1111/j.l467-9957.1965.tb00050.x.
Widodo, T. (2008). Dynamic changes in comparative advantage: Japan "flying geese" model and its implications for China. Journal of Chinese Economic and Foreign Trade Studies, 1(3), 200-213. DOI: 10.1108/17544400810912365.
Khandker, S. R., Koolwal, G. B. & Samad, H. A. (2010). Handbook on Impact Evaluation Quantitative Methods and Practices. Washington DC: The International Bank for Reconstruction and Development, 239.
Shelburne, R. C. (2010). The Global Financial Crisis and Its Impact on Trade: The world and The European Emerging Economies. Discussion Paper. United Nations Economic Commission for Europe. Retrieved from: https://www.unece.org/fileadmin/DAM/oes/disc_papers/ECE_DP_2010-2.pdf (Date of access: 11.03.2018)
Damuri, Y. R., Setiati, T, Atje, R. & Santosoç, В. (2015). European Report on Development 2015. Financing and other means of implementation in the post-2015 context, Indonesia Country Illustration. Retrieved from: https://ec.europa.eu/euro-peaid/sites/devco/files/erd5-country-illustration-indonesia-2015_en.pdf (Date of access: 03.07.2018).
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2020 Chandra Utama, Ruth Meilianna
This work is licensed under a Creative Commons Attribution 4.0 International License.
