Interest Rate, Inflation, and Public Debt: What Is Causing Exchange Rate Volatility in Indonesia?

MT. Sabirin, Dwi Budi Santoso, Munawar Munawar, Putu Mahardika

Abstract


The exchange rate is one of the most essential factors of a country's economic stability measurement. In the world open market economy, the exchange rate shows how strong a country's bargaining of trade, which is precarious to determine cost and volume of goods n services to create a profit. This paper seeks to present macroeconomic variables that affect the exchange rate movement, given that Indonesia's exchange rate is very volatile and has a significant impact on economic conditions. In order to identify the influential variables, the VECM method is exercised, using time series data that consist of Indonesia’s exchange rates, interest rates, inflation and public debt for the 1990Q1 to 2018Q4 period. This research findings are: first, the exchange rate appreciation is influenced by increasing in interest rate, and exchange rate depreciation is influenced by rising of inflation and public debt; second, prediction of the exchange rate, can be do with interest rate and public debt, while exchange rate can be used to predict interest rate, inflation and public debt; third, needs about 9 (nine) periods or 2 1/4 (two and a quarter) year for stabilizing exchange rate that influenced by other variables. Hence, It is critical to keep inflation rate, interest rate, and the level of public debt steady to utilize the exchange rate volatility.


Keywords


exchange rate; interest rate; public debt; VECM.

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References


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