Essays on Commodity Price Fluctuations and the Indonesian Economy

This dissertation examines the implications of commodity price fluctuations on the economies of commodity-exporting countries, using Indonesia as a case study. It consists of three chapters. Chapter one examines firms' investment inefficiency across sectors in a resource-rich country during commodity boom and bust periods. Understanding the effect of commodity price fluctuations on investments is essential to understanding the transmission channel of commodity price shocks to the economy. This chapter estimates the prevalence of firms' investment inefficiency (particularly overinvestment) across sectors and the role of commodity price fluctuations in driving overinvestment. Subsequently, it examines the consequence of overinvestment during the boom period on firms' financial performance in the bust period. The data is panel data of Indonesian listed firms between the 1990s and 2019. The empirical result shows that commodity price growth increases the likelihood of firms' overinvestment in the resource sector and, to some extent, in the service sector. A one standard deviation increase in commodity price growth increases the probability of overinvestment in the resource sector by around 20 percent during the boom period. However, the effect is smaller during a higher volatility period. In addition, overinvested firms tend to have weaker financial performance in the subsequent bust periods. The commodity price boom is likely to trigger overinvestment in resource firms through an increase in free cash flow and lower cost of external financing. Chapter two examines the significance of the macro-financial linkage between the banking sector and the economy of a resource-rich country during commodity booms and busts in the 2000s. The analyses are divided into two parts. The first part uses panel vector autoregression (Panel VAR) for 46 publicly listed Indonesian banks, to assess the direction and magnitude of macro-financial linkage following commodity price shocks. The second part uses a case study to illustrate the effect of commodity price busts in 2012-16 on the Indonesian corporate and banking sector. The results show evidence that the banking sector is procyclical to the commodity price movements, and there is a feedback loop among bank variables and between bank balance sheets and economic growth. Chapter three examines how commodity price booms and busts affect manufacturing firms and exporters. The theory predicts wage rate in the manufacturing sector would increase, the number of workers in the manufacturing sector would fall, and the least productive manufacturing exporters would exit the export market. The findings in the empirical literature have been mixed, and studies are mostly limited to North and Latin American countries. This chapter presents evidence using Indonesian data, a major emerging market commodity exporter. The identification relies on the exogeneity of commodity price movement and cross-section variation in the district's commodity dependence before the boom. The result shows some evidence that the commodity boom negatively affects manufacturing firms, particularly in the number of production workers employed. In terms of transmission mechanism, there is evidence for the wealth and cost channel of commodity price. The evidence for the factor linkage channel is relatively weak.

Author

• Prassetya, Rully

Language

• English

Keyword

• Macrofinancial
• Investment
• Commodity prices
• Manufacturing
• Indonesia

Date created

• 2025

Type of Work

• Dissertation

License

• All rights reserved

Rights statement

• In Copyright

GW Unit

• Economics

Degree

• Ph.D.

Advisor

• Chen, Maggie X.
• Kaminsky, Graciela L.

Committee Member(s)

• Williams, Tomas

Persistent URL

•  https://scholarspace.library.gwu.edu/etd/h989r4277