Abstract
The paper aims to assess the monetary integration between Indonesia and oil exporting countries in Islamic countries. Increasing the oil trade intensity between Indonesia and oil-producing countries can drive monetary integration among them. This study applies the Optimum Currency Area (OCA) index to measure the degree of monetary integration between Indonesia and 21 oil-producing countries in the OIC. The results exhibit that the majority of oil-producing countries are strongly integrated with Indonesia. The panel regression test highlights two variables – the inflation similarity and trade openness – which had a significant effect on the OCA. This study provides an important policy base for Indonesia, primarily in improving its relations with oil-producing countries. Two channels – trade openness and maintaining harmonious price stability – are the entry point for Indonesia to integrate with oil countries.
Highlights
Indonesia makes at least three significant contributions to the economy of the Organization of Islamic Cooperation (OIC)
Optimum Currency Area (OCA)-index This study has successfully calculated the standard deviation (SD) of the changes in the nominal exchange rates for each country with the following results (Table 1 and Figure 2)
The OCA-index identifies that Indonesia has successfully integrated strongly with 12 of the 21 OIC oil countries, two of which fall into the converging category
Summary
Indonesia makes at least three significant contributions to the economy of the Organization of Islamic Cooperation (OIC). Indonesia has the largest Gross Domestic Product (GDP) in the OIC, having reached almost 1 Trillion US $ by 2017 (Bank Indonesia, 2018). The country has a large economy that is capable of maintaining the stability of its currency. A large GDP indicates greater foreign exchange reserves, and allows the country to intervene in the money market when its currency suffers instability. The share of Indonesia’s foreign trade in the OIC intra-trade reached 10%, and was listed among the top five countries in the OIC (SESRIC, 2018). The trade openness experienced by Indonesia can strengthen the symmetry of its currency with its trading partners. The population of Indonesia is the largest in the OIC, having reached 250 million. Indonesia is the largest contributor in terms of hajj and umrah in the world, reaching more than 250 thousand people per year
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