Risk Threshold for Sustainable Current Account Balance of Payments: An Indonesian Case

Abstract

The objective of this study was to model the behavior of the Current Account Balance of Payments (CAB) for Indonesia. It also calculated the conditional Value at Risk (VaR) as a measure of the risk level of the CAB. An ARDL (Autoregressive Distributed Lag) model and an EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) model were used to estimate the CAB behavior for the annual data 1985-2018. The research found that exchange rates, growth of gross domestic product, inflation, total reserves, and unemployment are essential in determining the behavior and volatility of the CAB. The VaR calculated based on the conditional standard deviation that resulted from the EGARCH estimation shows that most of the time the Indonesian CAB is in safe conditions. However, the VaR has been violated by the actual CAB several times, and the violations coincide with various macroeconomic shocks. The Central Bank of Indonesia could calculate the VaR threshold using this method to evaluate the risky nature of the current account deficit. This study provides an alternative procedure to analyze and assess the current account balance risk to mitigate the impact of macroeconomic shocks.