Fiscal and Monetary Policy, Trade Openness, and its Impact on Indonesian Exchange Rate

Abstract

Indonesian rupiah has been quite volatile in recent years. There are many factors determined the fluctuation of rupiah. It is necessary to study which of these variables, including; fiscal, monetary, and external trade policy, affect the fluctuation of the rupiah exchange rate. ARDL (Autoregressive Distributed Lag) model with quarterly data from 2008 to 2018 is used to study the short and long-term effects between the variables studied. The results showed that all variables are co-integrated but partially does not affect the exchange rate in the long run. Deeply, these variables greatly influence the fluctuation of the rupiah exchange rate in the short term. Therefore, it can be suggested that firstly, the financing of the fiscal deficit with Sovereign Debt Instruments is better than foreign debt, given the different effects on the rupiah exchange rate. Second, the monetary authority must consider domestic interest more competitive and view conditions in the real sector. Lastly, the weakening of the exchange rate due to increased imports can be an opportunity for exporters to improve export performance to stabilize the exchange rate.