Keywords: Current account, Cointegration, Consumption-smoothing, Intertemporal solvency, Present value model


This study investigates whether Indonesia’s Current Account (CA) balance is intertemporally solvent. We provide fresh evidence on Indonesia’s CA deficit solvency by considering post-crisis period data and conducting sub-sample analysis. Our findings suggest that Indonesia’s CA is not solvent. We notice evidence of excess lending prior to the global financial crisis of 2008 and excess borrowing in the postcrisis period. Policymakers need to focus on the composition of capital flows and management of volatile capital flows since discouraging foreign capital inflows may serve as a deterrent to economic growth.


Download data is not yet available.


Adedeji, O. (2001). Consumption-based Interest Rate and the Present-value Model of the Current Account-Evidence from Nigeria. IMF Working Papers. 2001/93. 1-29.

Ahearne, A. (2007). Global Imbalances: The Risks for the World Economy. Field Day Review, 3, 108-123.

Bergin, P. R., & Sheffrin, S. M. (2000). Interest Rates, Exchange Rates and Present Value Models of the Current Account. The Economic Journal, 110, 535-558.

Blanchard, O., & Milesi-Ferretti, G. M. (2009). Global Imbalances: In Midstream? (No. 2009/029). International Monetary Fund.

Blanchard, O., & Milesi-Ferretti, G. M. (2012). (Why) Should Current Account Balances be Reduced? IMF Economic Review, 60, 139-150.

Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2016). Capital Flows: Expansionary or Contractionary? American Economic Review, 10, 565-69.

Caballero, R. J., Farhi, E., & Gourinchas, P. O. (2015). Global Imbalances and Currency Wars at the ZLB. NBER Working Papers, 21670.

Callen, M. T., & Cashin, M. P. (1999). Assessing External Sustainability in India. International Monetary Fund. IMF Working Paper, WP/99/181, December.

Campbell, J. Y. (1987). Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis. Econometrica, 55, 1249-1273.

Campbell, J. Y., & Shiller, R. J. (1987). Cointegration and Tests of Present Value Models. Journal of Political Economy, 95, 1062-1088.

Cashin, P., & McDermott, C. J. (1998). Are Australia’s Current Account Deficits Excessive? Economic Record, 74, 346-361.

Cashin, P., & McDermott, C. J. (2002). Intertemporal Consumption Smoothing and Capital Mobility: Evidence from Australia. Australian Economic Papers, 41, 82-98.

Darku, A. (2010). Consumption Smoothing, Capital Controls and the Current Account in Ghana. Applied Economics, 42, 2601-2616.

Dooley, M. P., Folkerts-Landau, D., & Garber, P. M. (2003). An Essay on the Revived Bretton Woods System. National Bureau of Economic Research Working Paper No. 9971. DOI: 10.3386/w9971

Garg, B., & Prabheesh, K. P. (2017). Drivers of India’s Current Account Deficits, with Implications for Ameliorating Them. Journal of Asian Economics, 51, 23-32.

Garg, B., & Prabheesh, K. P. (2018). External Shocks, Consumptionsmoothing and Capital Mobility in India: Evidence from an Intertemporal Optimization Approach. Applied Economics, 50, 4814-4829.

Garg, B., & Prabheesh, K. P. (2021). Testing the Intertemporal Sustainability of Current Account in the Presence of Endogenous Structural Breaks: Evidence from the Top Deficit Countries. Economic Modelling, 97, 365-379.

Ghosh, A. R. (1995). International Capital Mobility Amongst the Major Industrialised Countries: Too Little or Too Much? The Economic Journal, 105, 107-128.

Ghosh, A. R., & Ostry, J. D. (1995). The Current Account in Developing Countries: A Perspective from the Consumption-smoothing Approach. The World Bank Economic Review, 9, 305-333.

Guest, R., & McDonald, I. (1998). The Socially Optimal Level of Saving in Australia, 1960‐61 to 1994‐95. Australian Economic Papers, 37, 213-235.

IMF. (2014). Are Global Imbalances at a Turning Point? World Economic Outlook Research. URL: http://www. imf. org/external/pubs/ft/survey/so/2014/new093014b

IMF. (2019). Global Imbalances, IMF Staff Note, G-20 Finance Ministers, Downloaded from

IMF. (2021). World Economic Outlook Database.

Ismail, H., Baharumshah, A. Z., & MacDonald, R. (2013). Intertemporal Approach to the Current Account: Evidence from Malaysia and Indonesia. Jurnal Pengurusan, 37, 3-13.

Kano, T. (2008). A Structural VAR Approach to the Intertemporal Model of the Current Account. Journal of International Money and Finance, 27, 757-779.

Khundrakpam, J. K., & Ranjan, R. (2009). Consumption Smoothing and Current Account Balance in India: Further Evidence. Indian Economic Review, 44, 185-201.

Kim, K., Hall, V. B., & Buckle, R. A. (2006). Consumption-smoothing in A Small, Cyclically Volatile Open Economy: Evidence from New Zealand. Journal of International Money and Finance, 25, 1277-1295.

Kwiatkowski, D., Phillips, P. C., Schmidt, P., & Shin, Y. (1992). Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure are We that Economic Time Series Have a Unit Root? Journal of Econometrics, 54, 159-178.

Landeau, S. A. S. (2002). The Intertemporal Approach to the Current Account: Evidence for Chile. Revista de Análisis Económico–Economic Analysis Review, 17, 95-121.

Makrydakis, S. (1999). Consumption-smoothing and the Excessiveness of Greece’s Current Account Deficits. Empirical Economics, 24, 183-209.

Milbourne, R., & Otto, G. (1992). Consumption Smoothing and the Current Account. Australian Economic Papers, 31, 369-384.

Moccero, D. N. (2008). The Intertemporal Approach to the Current Account: Evidence for Argentina. Journal of Applied Economics, 11, 327-353.

Narayan, P. K. (2005). The Saving and Investment Nexus for China: Evidence from Cointegration Tests. Applied Economics, 37, 1979-1990.

Narayan, P. K., & Popp, S. (2010). A New Unit Root Test with Two Structural Breaks in Level and Slope at Unknown Time. Journal of Applied Statistics, 37, 1425-1438.

Narayan, P. K., & Popp, S. (2013). Size and Power Properties of Structural Break Unit Root Tests. Applied Economics, 45, 721-728.

Narayan, S., & Sriananthakumar, S. (2020). Are the Current Account Imbalances on a Sustainable Path? Journal of Risk and Financial Management, 13, 201.

Obstfeld, M., & Rogoff, K. (1995). The Intertemporal Approach to the Current Account. Handbook of International Economics, 3, 1731-1799.

Ogus, A., & Sohrabji, N. (2008). On the Optimality and Sustainability of Turkey’s Current Account. Empirical, 35, 543-568.

Otto, G. (1992). Testing a Present-value Model of the Current Account: Evidence from US and Canadian Time Series. Journal of International Money and Finance, 11, 414-430.

Otto, G. (2003). Can an Intertemporal Model Explain Australia’s Current Account Deficit? Australian Economic Review, 36, 350-359.

Padhan, R., & Prabheesh, K. P. (2020). Business Cycle Synchronization: Disentangling Direct and Indirect Effect of Financial Integration in the Indian Context. Economic Modelling, 85, 272-287.

Phillips, P. C., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75, 335-346.

S, N., & Matondang, S. P. (2016). Early Warning System and Currency Volatility Management in Emerging Market. Buletin Ekonomi Moneter dan Perbankan, 19, 129-152.

Sachs, J. D. (1981). The Current Account and Macroeconomic Adjustment in the 1970s. Brookings Papers on Economic Activity, 1, 201–268.

Sachs, J. (1982). The Current Account in the Macroeconomic Adjustment Process. The Scandinavian Journal of Economics, 84, 147–159.

Sheffrin, S. M., & Woo, W. T. (1990). Present Value Tests of an Intertemporal Model of the Current Account. Journal of International Economics, 29, 237-253.

How to Cite
Garg, B., & Prabheesh, K. (2022). IS INDONESIA’S CURRENT ACCOUNT BALANCE OPTIMAL? EVIDENCE FROM AN INTERTEMPORAL APPROACH. Buletin Ekonomi Moneter Dan Perbankan, 25, 1-18.