2. Introduction The main goal of research is to investigate what
variables determine the exchange rate performance. Why Indonesia:
is the 18-th largest economy in the world and Southeast Asia's
largest economy; is emerging and fast growing economy; managed
floating exchange rate regime; an appropriatecandidate to be
included in the BRIC countries as the country is rapidly showing
signs of similar newly advanced economic development; the recent
upgrades in the country's credit ratings by international financial
services companies such as Standard & Poor's, Fitch Ratings and
Moody's. 3. Theoretical background Monetary approach exchange rates
are determined in the process of aligning or balancing the overall
demand and supply of the national currency. Money Supply Ms , P and
E$/ Depreciation of $against to Interest Rate R , L(R$,Yus) , P
Appreciation of $ against Output Level Output , L(R$, Yus) , P
Appreciation of $ against to 4. Theoretical background o Monetary
approach (dominant model of exchangerate determination (Diamandis
and Kouretas, 1996, p. 351) - focuses on domestic and foreign Ms
and Md and proposes that exchange rates are affected by the money
supply, income level, and interest rates in the long run (Frenkel,
1976; Dornbush, 1976; Frankel, 1979); o Relative PPP approach -
exchange rate changesover time are assumed to be dependent on
inflation rate differentials between countries (Ricardo, Cassel,
19th century). Inflation Rate If the Indonesian inflation rate
exceeds the US inflation rate, then the dollar will appreciate by
that differential over the same period. 5. General background The
main changes to the exchange rate regimes in Indonesia 1 January
1996 The Bank Indonesia (BI) within a systemof managed float
determined the exchange rate; 28 February 1998 A foreign exchange
subsidy for foodwas introduced, which led to the reclassification
of the exchange rate system from unitary to dual; De Facto
Indonesia has floating exchange rate withinflation targeting
framework. 6. 0
Q2-Q3-Q4-Q1-Q2-Q3-Q4-Q1-Q2-Q3-Q4-Q1-Q2-Q3-Q4-Q1-Q2-Q3-Q4-Q1-The US
and Indonesian interest rates60504030 the US20 Indonesia10 7.
-10-20-50-60-70-80
Q2-2012Q3-2011Q4-2010Q1-2010Q2-2009Q3-2008Q4-2007Q1-2007Q2-2006Q3-2005Q4-2004Q1-2004Q2-2003Q3-2002Q4-2001Q1-2001Q2-2000Q3-1999Q4-1998Q1-1998The
US and Indonesian trade balances100-30 the US-40 Indonesia 8. The
US and Indonesian GDP growth rates 9. The US and Indonesian
inflation rates 10. Exchange rate performance (RUP/USD) 11.
Methodological framework & data description Ordinary Least
Squares and quantitative methods; Quarterly data from OECD database
for the period from the 1stquarter of 1998 to the 4th quarter of
2012. Hypothesis: exchange rate behavior between IDR and USD
depends on the analyzed variables.ER - quarterly averaged spot
exchange rate (IDR/USD) DGDP - difference between Indonesian and
USA nominal GDP (in billions of USD); DINTR- difference between
Indonesian and USA short-term interest rate DINFL - difference
between Indonesian and USA inflation rate (CPI) DTB - difference
between Indonesian and USA net export (in billions of USD) 12.
Methodological framework & data description Proxies Inflation
in Indonesia is , depreciation of IDR against USD (by the amount of
inflation rates differential); Nominal GDP growth rate in Indonesia
is , appreciation of IDR against USD; Short-term interest rate in
Indonesia is , IDR appreciates against USD; Trade balance surplus
in Indonesia (USA deficit), IDR appreciates against USD. 13.
Results Augmented Dickey-Fuller testVariableDickey-Fuller Test
resultsStat.Critic. Value (1% level)gdp (GDP)-1.9862-3.5482intr
(Interest Rate)-4.5902infl (Inflation)ResultsDickey-Fuller Test
resultsStat.-4.7985-3.5482-3.5482Stationary---5.0494-3.5461Stationary--tb
(Trade balance)-2.1120-3.5482genrdtb=d(tb)-4.6782-3.5482er
(Exchange rate)-3.8311-3.5460Stationary--New
variableStationarydgdpStationary-Stationary-StationarydtbStationary-Critic.
Value (1% level)genrdgdp=d(g dp)Results 14. Results Estimated
results of the model ValueConclusion0.709070.9% of the variation in
the response variable can be explained by the explanatory
variablesR-squaredAdjusted R-squared0.6871 DGDP(-1)0.0000Variable
is significantINTR(-1)0.0053Variable is
significantINFL0.0000Variable is significantDTB(-1)0.0174Variable
is significantProb. 15. Results The results of Jargue-Bera test,
White test and Breusch-Godfrey testValue Normality
(JargueBeratest)Conclusion0.6828The critical value of Jargue-Bera
test is lower than 5.99 so residuals are normally
distributedHeteroskedasticity (White test) 0.8971Prob. is higher
than 0.05 so we reject H1 hypothesis and accept H0 hypothesis about
homoscedasticityAutocorrelation (BreuschGodfrey test) 0.1959Prob.
is higher than 0.05 so we reject H1 hypothesis and accept H0
hypothesis about the absence of autocorrelation 16.
ResultsVariables with direct correlation: GDP and inflation
(positive signs). If the difference between Indonesian GDP and the
US GDP increase by 1% it indicates that exchange rate will surge by
0.47%; if the difference in inflation rates increases by 1% than
the exchange rate rises by 201.95%.Variables with indirect
correlation: rate and trade balance (negative signs). If difference
between interest rates in two countries increase by 1%, the
exchange rate decrease by 23.85%; The exchange rate surges by
48.15% if trade balance rises by 1%. 17. Conclusion The exchange
rate is a dynamic variable, mobility of which is determined by a
wide range of economic, financial, political and social factors.
Among them, the most important are the following: GDP, inflation
rate, money supply, interest rate and trade balance. The latter
variables are described in relative PPP and monetary theories. The
research showed that all of them, with the exception of money
supply, are significant. Also, the model was successfully checked
for heteroskedasticity, normality and autocorrelation. The
variables passed the test for stationarity. Generally, proxies
explain the behavior of the analyzed exchange rate except the GDP.
However, the behavior of GDP is an exception, as external factors,
which are not included into the model, are influencing it. Thus,
our analysis confirms the hypothesis that we stated in the
quantitive part of the research and all the variables in the
equation have impact on the behavior of the IDR/USD exchange rate.
18. Thank you for your attention!
