In an overheating economy, several things can happen simultaneously: the value of the rupiah depreciates, high inflation and a trade balance deficit.
I n a recent interview, president-elect Prabowo Subianto told Bloomberg of his goal of achieving an 8 percent growth rate within the next three to five years. While ambitious, escaping the middle-income trap requires a growth rate of at least 6 percent within a very narrow window until 2045. However, aiming for growth above 5 percent comes with its own set of challenges. Using the Hodrick-Prescott filter method, we find that the gap between actual and potential output is only about 1 percent. This means that pushing growth to 6 percent or higher risks overheating the economy.
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