Simultaneous Equation: The Case of Inflation & Rupiah Exchange Rate in Indonesia 2001-2022

Abstract

This study aims to determine the relationship between inflation and the rupiah exchange rate in Indonesia in 2001-2022, using simultaneous equations through a two-stage least square (2SLS) approach. The method used in this study is simultaneous equation regression, in which the variables are interconnected. The data used in this study is Indonesian state data for 2001-2022, including inflation, exchange rates, interest rates, gross domestic product, and exports obtained from the Badan Pusat Statistik (BPS) Indonesia website. The results of the study based on the two-stage least square (2SLS), the simultaneous equation of inflation (INF), showed that the variable interest rate (R) and gross domestic product (GDP) had a significant effect on inflation (INF). In contrast, the exchange rate variable (ER) did not significantly affect inflation (INF). Simultaneously, the exchange rate (ER), interest rate (R), and gross domestic product (GDP) affected inflation (INF) because F (prob) was smaller from alpha = 5%. Then, in the exchange rate equation (ER), inflation variables (INF), money supply (M2) and exports (X) have a significant effect on the exchange rate. Simultaneously, Inflation (INF), money supply (M2), and exports (X) affect the exchange rate (ER) because F (prob) is smaller than alpha = 5%.