Rupiah exchange rate: the determinants and impact of shocks on the economy

Abstract

The repetition of policy dynamics on Quantitative Easing (QE) and interest rate by The Fed potentially cause fluctuations in the exchange rate, including in Indonesia. Therefore, this study aims to analyze the determinants and impacts of exchange rate shocks. Inflation (INF), Money Supply (LJUB), Open Market Operations (OPT), Foreign Exchange Reserves (LCD), Expected Inflation (LEHU) and Interest Rates (SB) were used to analyze the determinants of Exchange Rate (NT) through Auto Regressive Distributed Lag (ARDL). The impact of NT shocks was analyzed using Vector Auto Regressive (VAR) by LEHU, Residential Property Price Index (PIHPR), Stock Transactions (LTRANS), and Banking Credit Volume (VK). The Expected Inflation variable and incorporation of ARDL-VAR are novelties in this study. In the secondary time series data for 2014M1 – 2022M9 period, the ARDL results showed that INF and LJUB had positive effect on NT in both long and short run, while OPT, LCD and SB had negative effect. LEHU had negative effect in the short run, but positive in the long run. The speed of adjustment in the model was 49.86% per month. Shock of NT had impacted VK until 15 months, PIHPR at 7 months, LTRANS at 10 months, and LEHU at 14 months. Based on these results, it can be implied that the monetary authority must maintain stability of NT, especially by INF and LJUB transmission. Next, shock's impact must also be overcome, especially on VK. This research is only focused on monetary sector, further research will be refined with other macroeconomic variables.