This study explores the conflict between domestic structural reforms (structural anchors) and the external financial framework (currency dependence) and their impact on monetary policy resilience in Emerging Southeast Asia (ESEA). It connects macroeconomic evidence with the geopolitical economy. To ensure analytical clarity, these anchors are conceptually defined by factors such as institutional quality, trade diversification and the extent of domestic price rigidity. Amidst the growing fragmentation of global geopolitics and the enduring dominance of the US dollar, ESEA nations face a significant dilemma. This dilemma encapsulates a fundamental geopolitical trade-off: should they prioritize the strengthening of their internal economies and institutions, or should they risk becoming constrained by policies shaped by global financial shocks? To address this issue, we utilize a Structural Vector Autoregression (SVAR) model to analyze the dynamics of core inflation in two contrasting cases: Indonesia, which employs Rupiah flexibility, and Vietnam, which maintains a Managed Dong anchor. Our analysis covers the period from the first quarter of 2015 to the fourth quarter of 2024, allowing for an empirical comparison of the effectiveness of their respective policy models. Our analysis indicates that Indonesia's inflation volatility is predominantly influenced by global shocks and a high Exchange Rate Pass-Through (ERPT), highlighting the significant costs associated with currency dependence. In contrast, Vietnam maintains relative price stability through its managed exchange rate, which serves as an effective, state-directed structural shield. The findings suggest that the struggle for monetary autonomy is materially quantified by the degree of ERPT and the choice of exchange rate regime. Crucially, this stability is achieved at the potential cost of diminished monetary policy signaling and the necessity for larger external reserve buffers. This study, therefore, offers crucial, empirically backed insights into the restricted policy space available to ESEA nations amidst global financial volatilitye.
Muljono et al. (Thu,) studied this question.