The Role of Economic Fundamentals in Explaining Indonesian Currency Crisis

Moh. Khusaini

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: This paper examines the determinants of currency crisis, particularly the role of economic fundamentals in explaining the currency crisis in Indonesia in the 1990’s. This study has an objective: to analyze the role of the ratio of M2 to reserves, the ratio of banks’ claims on the private sector to Gross Domestic Product, the ratio of current account deficit to Gross Domestic Product, the growth rate of Gross Domestic Product, reserves to import ratio, exchange rate system in explaining the currency crisis in Indonesia during period of observation. Using time series quarterly data for Indonesia spanning the period of quarter one 1990 to quarter four 2001, this study employs a simple regression model modified from the previous research, in which the change in the rupiah exchange rate is a linear function of the economic variables that represent the economic fundamentals of Indonesian economy. By using the Statistical Package for Social Science (SPSS), the results of this study indicate that selected variables of economic fundamentals simultaneously contribute to the currency crisis. The value of coefficient determination (R2) of 0.959 indicates “the goodness of fit” toward group of data, and implies that 95.9 % of the variation in the rupiah exchange rate during the period of observation can be explained by the chosen variables. The linkage between economic fundamentals and the currency crisis is also supported by regression model, in which the increase in the ratio of banks’ claim on private sector to GDP and the increase in the ratio of current account deficit to GDP led to the depreciation of the rupiah exchange rate during the observation. Similarly, the growth rate of GDP has had a positive impact on the rupiah exchange rate, which means that growth rate of GDP led to an appreciation of rupiah exchange rate. The abandonment of the pegged exchange rate system resulted in the depreciation of the rupiah exchange rate. For this reason, it is reasonable to argue that there is a linkage between the weaknesses of economic fundamentals and currency crisis during observation. However, the ratio of M2 to reserves is statistically insignificant.

Keywords: Indonesia; currency; GDP (search for similar items in EconPapers)
Pages: 49 pages
Date: 2002-04-01
New Economics Papers: this item is included in nep-ifn, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://icepp.gsu.edu/files/2015/03/ispwp0219.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper0219

Access Statistics for this paper

More papers in International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University Contact information at EDIRC.
Bibliographic data for series maintained by Paul Benson ().