Analysis The Determination of The Stability of Exchange Rates In Indonesia

Abstract

The exchange rate is the value of the currency of a country with the value of the currency of other countries, which used to make the international trade. This study aims to analyze the effect of BI Rate, money supply, inflation, foreign exchange tourism, exports and imports on the exchange rate in Indonesia. The analysis uses cointegration equation with Error Correction Model (ECM) method. This paper investigates the relationship between the dependent and independent variables in both the short term and long term. The estimation results show that in the short term, variables that affect the rupiah exchange rate on US $ in Indonesia are BI interest rate and exports. While in the long run, the independent variable effect on the exchange rate of the rupiah is the BI interest rates, money supply, and export also. Inflation, foreign exchange tourism, and import do not affect rupiah exchange rate either in short or long term. These results show that control the level of interest rates and the money supply as well as encouraging exports have a crucial role in controlling the exchange rate so that the economy will be in a stable condition.

Exchange Rate Analysis: Short-Term and Long-Term Balance

“…This finding supports the results of research from Ginting et al (2017) that in the short term, inflation does not affect the IDR/USD exchange rate because, during the study period, the IDR exchange rate is influenced by the inflation variable. The findings from Demak et al (2018) will also not occur because the effect of inflation in the community's short term does not, and in the short term, changes in their spending behavior from expensive domestic goods to cheaper imported goods.…”

“…The results of this study strengthen the results of previous studies by Ginting et al (2017), which have a negative influence between exports and the IDR/USD exchange rate. Nachrowi and Usman revealed that exports are one of the country's sources.…”

“…Under such conditions, the country will depreciate the domestic currency because foreign exchange earnings will decline. While the findings from Ginting et al (2017) show that inflation does not affect the movement of the IDR/USD exchange rate in the long term. It can happen because the inflation variable influences the IDR/USD exchange rate movement in the study period.…”

“…Nachrowi and Usman revealed that exports are one of the country's sources. An increase in exports will impact increasing demand for domestic currency, so that the exchange rate will weaken, meaning that the domestic currency will appreciate (Ginting et al, 2017). Sedyaningrum et al (2016) and Natalia (2020), in their research, also show that exports have a negative and significant effect on the IDR/USD exchange rate.…”

“…Therefore, according to Djulius and Yudi (2014), PPP conditions occur both short and long term. Yuliyanti (2014) and Ginting et al (2017) also reveal that money supply has a positive and significant influence in the long term. It follows the money supply theory by Irving Fisher, which shows a positive relationship between money supply and the exchange rate.…”