Determinants of the Indonesia's current account balance: an error correction model approach

Nur Feriyantoa

doi:10.9770/jesi.2020.7.4(55)

Abstract

This study aims to investigate the relationship between exchange rate, Domestic Money Supply (M2), real Gross Domestic Product (GDP), and Foreign Direct Investment (FDI) on Indonesia’s current account balance (CAB) in the short and long term. For the purpose of this study, the Error Correction Model (ECM) is used. It uses data during the period 2000-2017. The result showed that (a) M2, real GDP, and FDI in the short-term have not significant effect on Indonesia’s current account but exchange rate has a significant negative effect; (b) in the long-term exchange rate, M2, and real GDP have not significant effect on Indonesia’s CAB, while FDI has a negative significant effect on Indonesia’s CAB. Policy recommendation for government as an implication of this study (a) stabilize the exchange rate in order to decrease current account deficit (CAD); (b) improve the investment climate and issue incentive policies for local investor; (c) increase the competitiveness of export-oriented products and reduce dependence on imports.

Highlights

Indonesia, as a developing country, has a chronic problem that has yet to be resolved (Sasongko et al, 2019), namely the current account deficit (CAD)
The empirical model is represented by the Current Account Balance and is assumed to be affected by the rate of Exchange rate, M2, real Gross Domestic Product (GDP) and Foreign Direct Investment (FDI)
The results show that in developing countries the exchange rate has a negative effect and GDP has negative effect on the current account balance, while in developed countries the exchange rate and GDP both have a positive impact on the current account balance

Summary

Introduction

As a developing country, has a chronic problem that has yet to be resolved (Sasongko et al, 2019), namely the current account deficit (CAD). The CAD is a condition when the value of import of goods and services of a country is higher than its exports. This condition indicates that the performance of domestic industries has not been able to compete with other countries. The problem of CAD becomes a very important duty for government to immediately obtain a solution so that the performance of Indonesia’s national economy gets better. A current account surplus condition is evidence of the strength of a country in establishing economic cooperation with other countries and representing a strong condition of competitiveness in trading on global market

Objectives

Methods

Findings

Discussion

Conclusion