Determinants of the Indonesia's current account balance: an error correction model approach

Nur Feriyantoa ()
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Nur Feriyantoa: Islamic University of Indonesia, Indonesia

Entrepreneurship and Sustainability Issues, 2020, vol. 7, issue 4, 3410-3425

Abstract: This study aims to investigate the relationship between exchange rate, Domestic Money Supply (M2), real Gross Domestic Product (GDP), and Foreign Direct Investment (FDI) on Indonesia’s current account balance (CAB) in the short and long term. For the purpose of this study, the Error Correction Model (ECM) is used. It uses data during the period 2000-2017. The result showed that (a) M2, real GDP, and FDI in the short-term have not significant effect on Indonesia’s current account but exchange rate has a significant negative effect; (b) in the long-term exchange rate, M2, and real GDP have not significant effect on Indonesia’s CAB, while FDI has a negative significant effect on Indonesia’s CAB. Policy recommendation for government as an implication of this study (a) stabilize the exchange rate in order to decrease current account deficit (CAD); (b) improve the investment climate and issue incentive policies for local investor; (c) increase the competitiveness of export-oriented products and reduce dependence on imports.

Keywords: exchange rate; domestic money supply; real GDP; Foreign Direct Investment; Indonesia's current account (search for similar items in EconPapers)
JEL-codes: E51 F14 F21 F23 F31 F32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ssi:jouesi:v:7:y:2020:i:4:p:3410-3425

DOI: 10.9770/jesi.2020.7.4(55)

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