How uncertainty and investment drive Indonesia’s exchange rate adjustment: An ECM model approach
Keywords:
Uncertainty, Exchange rate, ECM model, IndonesiaAbstract
This study examines how uncertainty shapes the dynamics of the Indonesian rupiah against the US dollar, emphasizing the long-run and short-run adjustment mechanisms that occur within the economy. Using quarterly data from 2000 to 2024, the research employs an Error Correction Model (ECM) to examine the influence of the Indonesia World Uncertainty and investment on the exchange rate. The long-run estimations reveal that investment and uncertainty significantly contribute to movements in the exchange rate. In the short run, changes in investment influence exchange rates, while uncertainty does not have any impact. The ECT is negative and statistically significant, confirming that deviations in the exchange rate gradually return to equilibrium over time. This study highlights that despite the turbulence of global uncertainty, Indonesia’s exchange rate dynamics demonstrate a degree of resilience, driven more by domestic fundamentals than by global volatility. These findings hold meaningful implications for policymakers, underscoring the need to strengthen macroeconomic stability and investment performance as anchors of exchange-rate sustainability.
References
1. M. Obstfeld, J. C. Shambaugh, and A. M. Taylor, “The trilemma in history: Tradeoffs among exchange rates, monetary policies, and capital mobility,” Review of Economics and Statistics, vol. 87, no. 3, pp. 423–438, 2005, doi: 10.1162/0034653054638300.
2. P. R. Krugman, M. Obstfeld, and M. J. Melitz, International Economics: Theory & Policy. 2016. [Online]. Available: http://www.biblioteca.pucminas.br/teses/Educacao_PereiraAS_1.pdf%0Ahttp://www.anpocs.org.br/portal/publicacoes/rbcs_00_11/rbcs11_01.htm%0Ahttp://repositorio.ipea.gov.br/bitstream/11058/7845/1/td_2306.pdf%0Ahttps://direitoufma2010.files.wordpress.com/2010/
3. C. M. Basri and S. Rahardja, “The Global Financial Crisis and Asian Economies: Impacts and Trade Policy Responses,” ASEAN Econ Bull, vol. 27, no. 1, pp. 77–97, 2010, doi: 10.1355/ae27-le.
4. R. Dornbusch, “Expectations and Exchange Rate Dynamics, rJournal of Political Economy,” Journal of Political Economy, vol. 84, no. 6, pp. 1161–1176, 1976.
5. N. Bloom, “The Impact of Uncertainty Shocks,” Econometrica, vol. 77, no. 3, pp. 623–685, May 2009, doi: 10.3982/ecta6248.
6. S. R. Baker et al., “Measuring Economic Policy Uncertainty,” no. March, 2016.
7. P. R. Lane and G. M. Milesi-Ferretti, “The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004,” 2007. doi: 10.1016/j.jinteco.2007.02.003.
8. H. Ahir, N. Bloom, and D. Furceri, “The World Uncertainty Index,” Cambridge, Feb. 2022. Accessed: May 13, 2025. [Online]. Available: https://worlduncertaintyindex.com
9. A. Abid, “Economic policy uncertainty and exchange rates in emerging markets: Short and long runs evidence,” Financ Res Lett, vol. 37, p. 101378, 2020, doi: 10.1016/j.frl.2019.101378.
10. A. Abid and C. Rault, “On the Exchange Rates Volatility and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets,” Journal of Quantitative Economics, vol. 19, no. 3, pp. 403–425, 2021, doi: 10.1007/s40953-021-00240-4.
11. H. G. Keefe and S. Saha, “Global Uncertainty and Exchange Rate Conditions: Assessing the Impact of Uncertainty Shocks in Emerging Markets and Advanced Economies,” 2023. [Online]. Available: https://ssrn.com/abstract=4670637
12. M. Bicchal and S. Raja Sethu Durai, “Assessing Macroeconomic Uncertainties for an Emerging Economy,” Tokyo, 1124, Apr. 2020. Accessed: May 14, 2025. [Online]. Available: https://www.adb.org/publications/assessing-macroeconomic-uncertainties-emerging-economy
13. R. F. ; Engle and C. W. J. Granger, “Co-Integration and Error Correction : Representation, Estimation, and Testing,” Econometrica, vol. 55, no. 2, pp. 251–276, 1987.
14. S. Johansen, “Statistical analysis of cointegration vectors,” J Econ Dyn Control, vol. 12, pp. 231–254, 1988, doi: 10.1016/0165-1889(88)90041-3.
15. W. Enders, Applied Econometric Times Series: Student’s Resource Guide to Accompany. 2010. [Online]. Available: http://books.google.com/books?id=uu-CngEACAAJ&pgis=1
16. L. Chen, Z. Du, and Z. Hu, “Impact of economic policy uncertainty on exchange rate volatility of China,” Financ Res Lett, vol. 32, no. 109, pp. 1–5, 2020, doi: 10.1016/j.frl.2019.08.014.
17. F. S. Ramadhani, Abd. Rahim, S. Astuty, D. R. D. Hastuti, and I. Irwandi, “Analysis of Factors Affecting Exchange Rate Fluctuations in Indonesia,” International Journal of Economics and Management Sciences, vol. 2, no. 1, pp. 423–432, 2025, doi: 10.61132/ijems.v2i1.605.
18. M. Adnan, R. Meutia, and U. Ulya, “Analysis of the Rupiah Exchange Rate in Indonesia,” in Navigating teh Future Challenges in Liter acy: Islamic Economics, Business, and Public Policy Perspective, 2024, pp. 656–673.
Downloads
Published
Conference Proceedings Volume
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.