Exchange Rate Fluctuation in Indonesia: Vector Error Correction Model Approach

Abstract

Exchange rate in the last few years has been fluctuating highly. A number of variables were used in this research to analyze which variable has impact on exchange rate. The variables used were export, import, money supply and Bank Indonesia rate, for the period of January 2010 until September 2015, utilizing vector error correction model or VECM estimation method. The results indicate that in the long run, some variables such as import and money supply have significant correlations to exchange rate with positive and negative impact respectively, while export and BI rate have no significant correlation to exchange rate with negative and positive impact respectively. In the short run, all variables bear significant influence on exchange rate except money supply, whereas import, money supply and BI rate maintain a positive relationship with the exchange rate. Meanwhile, export has a negative influence on exchange rate. For impulse response and forecast error variance decomposition, the variable which induced the most shock to exchange rate was import.