IDEAS home Printed from
   My bibliography  Save this paper

Two Stage Markov Switching Model: Identifying the Indonesian Rupiah Per US Dollar Turning Points Post 1997 Financial Crisis


  • Mendy, David
  • Widodo, Tri


This paper aims to identify the Indonesia rupiah per US dollar turning points using a regime switching model. Firstly, to detect if nonlinear model suits the data at hand, the BDS test and CUSUM of square test was used and the results indicates that a nonlinear model suits the data. The paper then proceeds by using a univariate two state Markov Switching autoregressive model (MSAR) developed by Hamilton (1989), Engel and Hamilton (1990) to capture regime shifts behaviour in both the mean and the variance of the Indonesian rupiah per US dollar exchange rate between 2000 to 2015. The empirical evidence indicates strong transition probabilities suggesting that only extreme events can switch the series from an appreciation regime to a depreciation regime vice versa. Moreover, the results of the MSAR model was found to successfully capture the timing of the regime shifts of the Indonesian rupiah per US dollar exchange rate because of government intervention, Indonesian presidential elections, US financial crises of 2008, and the Indonesian current account deficit in 2013. Finally, the non-linear exchange rate dynamic of the Indonesian rupiah implied that regime-switching models have potential important implication for the macroeconomic literature documenting the effect of monetary policy shock and political environment on the economic aggregates. Furthermore, regime-switching models is well suited to capture the non-linearities in exchanges rate.

Suggested Citation

  • Mendy, David & Widodo, Tri, 2018. "Two Stage Markov Switching Model: Identifying the Indonesian Rupiah Per US Dollar Turning Points Post 1997 Financial Crisis," MPRA Paper 86728, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:86728

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    More about this item


    Exchange rates (Indonesian Rupiah per US Dollar); Nonlinearity; Markov switching model(MSAR);

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:86728. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.