Abstract
This study examines the effects of geopolitical risk on exchange rates in Indonesia. We augment conventional nominal exchange rate models with the geopolitical risk index developed by Caldara and Iacoviello (2017), and then estimate these augmented models using the ARDL approach to Co-integration. The data is monthly and runs from January 1998 to July 2019. We find evidence of Co-integration in the monetary model, when the IDR-USD exchange rates is used as dependent variable. Next, geopolitical risk is a significant short-run and long-run driver for the value of the IDR-USD exchange rate. Third, short-run and long-run exchange rate response to geopolitical risk differ greatly. Finally, while a higher geopolitical risk leads to a move away from Rupiah assets into Dollar assets (USD a safe haven), not all foreign currencies are seen as safe havens. We offer some practical implications arising from these findings.
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