Beyond the "Asian Flu". "Asia-vu"? Internal and External Risks for The Economy of Indonesia. Asset Price Bubbles and Contagion

Sammanfattning: Asset price bubbles and cross-country contagion, embodying an economy's domestic and foreign risks respectively, are two topical issues in finance. Indonesia, a fast-growing emerging market economy, and one of the world's volatile "Fragile Five", is a prime suspect for a country that is likely to exhibit vulnerabilities to both bubbles and contagion. Even more so, in the light of the massive money flows, induced by the Fed's quantitative easing operations and their subsequent "tapering". To test for bubbles, we apply decomposition of Indonesian stock, property, and foreign-exchange prices, based on Kalman filter estimation and unobserved components modeling. In the measurement of cross-country contagion we employ four well-known contagion tests (DFGM, FR, FG, and BKS) to evaluate equity spillover effects for Indonesia during the Lehman bankruptcy crisis, the Greek sovereign-debt crisis, and the Tapering scare of 2013. Ultimately, the paper comes up with a unified conceptual framework for joint testing of a country's resilience to both external and internal financial shocks. By defining and quantifying an innovative indicator of a country-specific risks level, dubbed the "bubbagion index", we provide a flexible blueprint for systematic global economic-threats reporting in the context of that framework. In particular, the empirical application of our combined methodology to the case of Indonesia indicates much greater susceptibility of this Southeast Asian country to contagion risks than to domestic asset-price bubble formations. The main findings of this new approach explicitly take into account the specificities of the economic-history, current macroeconomic-performance, foreign-trade, and global-imbalances/coordination conjuncture, when critically assessing the overall sustainability of the Indonesian economy.