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cy and capital controls. Monetary policy should control interest rate to achieve low inflation and stability of financial economic system. One of the main instruments of monetary policy is the exchange rate. The exchange rate is used to defend the national currency with domestic inflation rate. There are two purposes of exchange rate:

-. Exchange rate needs to provide confidence of domestic currency with a stable economic development.

-. Exchange rate also needs to guarantee international competitiveness and prevent high foreign debt and current account deficit.

In order to fulfill those purpose, exchange rates needs to combine high competitiveness such as current account surplus with stable nominal exchange rate and low inflation rate with interference of capital controls to avoid current account deficit and control depreciation.

In developing countries monetary policy should aim to stable nominal currencies, monetary policy needs to be subjected to exchange rate target. Monetary policy will be deteriorated if such exchange rate peg is in constellation of domestic currencya€™s full convertibility. Such examples will be high real of interest, the fragile economic situation such as big amounts of short term portfolio investment and short term bank credits that needs the usage of capital controls to stabilize the situation. In addition for those countries that implement inflation targeting as part of the monetary policy strategy, selective capital controls are also needed.

2.2 Fiscal Policy

Fiscal policy is policy that related with the government revenue, spending, taxation and borrowing for the economy. Government revenues contain the current revenues and the capital account revenues. Current revenues are resulted in direct and indirect taxes and social security contributions. Capital account revenues are resulted in public sector enterprises, sale of government property and repayment of loans. Government revenues may support the domestic investment with the proper policy and stability. With capital controls such as government tax and quantitative restrictions, capital flows can be controlled to insulate the domestic economy from the foreign shock. Capital controls will restrict the quantity of borrowing of domestic residents and government in the world market to preserve the domestic real interest rate. There are two elements for domestic real interest rate which are world real interest rate and transactions that being charged by government in form of licensing fee in the international capital market. Capital controls are also believed to prevent the foreign fiscal shock on output, macro-aggregates and domestic consumption. (Jeremy Greenwood and Kent P Kimbrough, 2001) In order for supporting capital controls to achieve the economic growth, ita€™s necessary to have a transparent and reliable regulation system and supervision by the authorities.

The Benefits of Capital Controls with Economic Policy
Capital controls can be used effectively as part of the state interventionas strategy with the combination of other complementary policy measures, and then capital controls can bring benefits to the economies in few ways (Kavaljit Singh, 2000).

-. Capital controls can be implemented as an effective tool to protect and defend domestic economy from the negative impact of external development and the volatile of c