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The Effects of Rupiah Exchange Rate Changes on the Indonesia Current Accounts, Period of 1990.I 2004.II

Author

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  • Arintoko

    (UGM)

  • Faried Wijaya

    (UGM)

Abstract

This research investigates the effects of exchange rate change on the relative current account and real GDP in Indonesia to US. This research provides time series evidence for the period of first quarter of 1990 to second quarter of 2004 under flexibel exchange rate regimes. The analysis is based on a J-Curve theory. First, this research employs unit root, cointegration and Granger causality tests and summarizes the relationships between real exchange rate, the current account, and real GDP. Second, the standard theoretical explanation of the J-Curve effect is used to motivate a vector autoregression (VAR) and error correction mechanism (ECM) analysis of real exchange rate change on the relative current account, and real GDP for Indonesia to US. This research finds weak evidence of a J-Curve for the Indonesia current account, in fact these empirical results reject the J-Curve hypothesis. The empirical study finds little evidence that a currency depreciation causes a current account deficits in the short run in Indonesia-US bilateral data and no evidence of a reliable long run effect of exchange rate change on the current account. Interestingly, empirical results show that these evidence are not consistent with the standard theoretical explanation of the J-Curve. Consequently, these empirical results pose a strong challenge for international economic theory and policy.

Suggested Citation

  • Arintoko & Faried Wijaya, 2005. "The Effects of Rupiah Exchange Rate Changes on the Indonesia Current Accounts, Period of 1990.I 2004.II," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 8(3), pages 1-21, December.
    • Handle: RePEc:idn:journl:v:8:y:2005:i:3:p:1-21
    DOI: https://doi.org/10.21098/bemp.v8i3.142
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