The COVID-19 pandemic and the exchange rate: a lesson learned from Indonesia

Abstract

This paper aims to capture the relationship between the COVID-19 pandemic and the exchange rate. We utilized high-frequency data by utilizing daily data from January 21st, 2020, through June 29th, 2022. In contrast to the vast majority of research that disregards the incubation period of COVID-19 in the number of daily transmission cases, we use the growth of COVID-19 as a 14-day moving average of confirmed cases as the main independent variables. Findings indicate that the devaluation of the rupiah exchange rate is long-term associated with the increase in COVID-19 cases and deaths. According to the efficient market hypothesis, the rupiah depreciates due to the increase of COVID-19 transmission, which is publicized by the media. In the midst of the debate over the impact of the pandemic on the exchange rate and using Indonesia as a lesson learned for emerging market economies, our research is a recent study that examines this topic with completed data-generating processes – when the pandemic entered its last wave phase. In regard to exchange rate behavior, the disease outbreak channel exists. The government must restrict widespread media coverage of data on the spread of COVID-19 while focusing on accelerating measures to control the pandemic. A low-interest rate imposed by the monetary authorities as an effort to stimulate economic recovery can also exert pressure on the exchange rate, necessitating the optimization of other instruments, such as foreign exchange intervention.