Abstract
Balance of trade has become an essential indicator for economic activities, particularly in countries adopting the open economy. During the last two decades, Indonesia has had trade surplus. The open economy has created dynamics in macroeconomic variables. The purpose of this research is to identify any dynamics between exchange rate, inflation, and balance of trade in Indonesia. Using the Autoregressive Distributed Lag, this study finds the dynamics between the said variables. In the short run, there are causalities between exchange rate and balance of trade, exchange rate and inflation, and balance of trade and inflation. In addition, J-Curve also occurred in Indonesia, where depreciation in exchange rate gradually improves the country’s balance of trade in the second and fourth quarters.
 Keywords: Exchange Rate, Inflation, Balance of Trade, Autoregressive Distributed Lag
 JEL Classification: F1, F4, C1
Highlights
Globalization is a process where the flow of ideas, people, goods, services, and capital becomes increasingly free, which leads to economic integration (IMF, 2002).There are four basic aspects of globalization: trade, movement of capital, movement of people, and the knowledge proliferation (IMF, 2000)
Indonesia is a small open economy that adopts a free-floating exchange rate, which means that its economy is influenced by domestic conditions and the economy of other countries, especially the trading partners
The estimation results of this study indicate that an increase in relative macroeconomic activity will increase the domestic aggregate supply, so inflation decreases because demand in the short term cannot follow the aggregate supply unless expansionary fiscal policy, expansionary monetary policy, or changes in preferences are made and public expectations are raised
Summary
Globalization is a process where the flow of ideas, people, goods, services, and capital becomes increasingly free, which leads to economic integration (IMF, 2002).There are four basic aspects of globalization: trade, movement of capital, movement of people, and the knowledge proliferation (IMF, 2000). Globalization is a process where the flow of ideas, people, goods, services, and capital becomes increasingly free, which leads to economic integration (IMF, 2002). Indonesia is a small open economy that adopts a free-floating exchange rate, which means that its economy is influenced by domestic conditions and the economy of other countries, especially the trading partners. The variables are related at least in the short term under certain institutional and structural assumptions (Yiheyis and Musila, 2018). It will be very interesting if their long-term dynamics can be identified as they eventually affect the economic performance of a country
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