Effect of Exchange Rates and Information and Communication Technology on Indonesia’s Economic Growth

Abstract

Foreign exchange rates as well as information and communication technology (ICT) are crucial in the global economy. Exchange rates affect trade balance, which influences gross domestic product (GDP) and economic growth. ICT also affects economic growth by reducing business transaction costs and increasing the income of investors and companies, stimulating national income and economic growth. This research examines the effect of exchange rate asymmetry and ICT on Indonesian economic growth, using annual time-series data on exchange rates, ICT usage (proxied by Internet, telephone, and mobile phone users), and economic growth (GDP from 1994 to 2018). The data were analyzed using a non-linear auto-regressive distributed lag model. The results show that the exchange rate exerts an asymmetric effect on long-term economic growth. ICT has short- and long-term positive effects on economic growth. According to the findings, the Indonesian government should stabilize the IDR/USD exchange rate through monetary policies to encourage economic growth. Monetary policy needs also to support IDR/USD exchange rate appreciation to enhance the trade balance, GDP, and economic growth. The economic growth of Indonesia, which is driven by ICT development, still needs to be sustained by the government initiating ICT development in cities and rural areas.