A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-á-vis Currencies of Primary Trade Partners

Agus Salim and Kai Shi
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Agus Salim: School of Economics, Northeast Normal University, Changchun 130024, China
Kai Shi: School of Economics, Northeast Normal University, Changchun 130024, China

JRFM, 2019, vol. 12, issue 2, 1-17

Abstract: Since the appearance of persistent research finding a disconnection between the exchange rate and its macroeconomic fundamentals, the empirical debate has not stopped. Studies employ various methods to explain the presence of the exchange rate disconnect puzzle, including applying models to the case of emerging market economies. However, the exchange rate has different determinants in some countries. To revisit this puzzle in an emerging market currency, we analyzed the cointegration of the exchange rate of the Indonesian Rupiah vis-á-vis currencies of primary trade partners and its macroeconomic fundamentals. The empirical results based on Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) models show that the fundamental variables consistently drive the exchange rate. The trade surplus as an extended nonlinear variable revealed high feedback to the exchange rate volatility in the long-run.

Keywords: cointegration; exchange rate disconnect puzzle; macroeconomic fundamentals; emerging market economies; NARDL; trade balance (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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