EXCHANGE RATE PARITY BETWEEN INDONE

EXCHANGE RATE PARITY BETWEEN INDONESIA AND ITS MAJOR FOREIGN COUNTRY TRADE PARTNERS

Foreign exchange market is one of the most unregulated markets. It is very tempting to find out that market mechanism, which is represented Purchasing Power Parity (PPP) is working for foreign exchange market in Indonesia. Indonesia could be considered as a small open economy. Theoretically, as part of a small open economy, foreign exchange rate in Indonesia is influenced
heavily by foreign economy. After experiencing economic crisis in 1998, Indonesian government set a policy to press down the central bank policy rate in order to reduce the interest differential. Even the domestic interest rate was decreasing, the capital inflow and foreign exchange reserve steadily increased. At the same time foreign exchange was fluctuating and tends to increase. Employing PPP Hypothesis and a regression model adopted by Bhargava et al (2011), and Sung Chul No (2011), and using 2001 to 2012 monthly data, the models of Purchasing Power Parity are tested. The statistical results shows that Purchasing Power Parity are not evident in the
relationship between Indonesian economy and it’s three major trade partners. The three major Indonesian trade partners are US, Japan, and European Countries. One possible cause of problem is the Indonesian government policy to push down the interest rate is not easily being adopted by the market.

Introducing ECM, the cointegration of real exchange rate of the three major trading partner and the influencing factors are tested. The influencing factors are interest, price, economic growth differential, and economic shock which is represented by oil price. It is found out that there are cointegration among them. Yen and US dollar are most elastic to price differential, since Euro is most elastic to interest differential. During the period of political succession or general election,
the exchange rate tends to fluctuate heavily.

Results (Indonesian) 1:

KURS PARITAS ANTARA INDONESIA DAN MITRA DAGANG UTAMA NEGARA ASING Pasar Valuta Asing adalah salah satu pasar yang paling tidak diatur. Sangat menggoda untuk mengetahui bahwa mekanisme pasar, yang diwakili Purchasing Power Parity (PPP) bekerja untuk pasar Valuta Asing di Indonesia. Indonesia bisa dianggap sebagai ekonomi terbuka yang kecil. Secara teoritis, sebagai bagian dari ekonomi terbuka yang kecil, kurs asing di Indonesia sangat dipengaruhi berat oleh ekonomi luar negeri. Setelah mengalami krisis ekonomi pada tahun 1998, pemerintah menetapkan kebijakan untuk tekan ke bawah suku bunga kebijakan bank sentral untuk mengurangi minat diferensial. Bahkan tingkat bunga domestik pada menurun, arus masuk modal dan cadangan devisa yang terus meningkat. Pada saat yang sama Valuta Asing adalah berfluktuasi dan cenderung meningkat. Mempekerjakan PPP hipotesis dan model regresi yang diadopsi oleh Bhargava et al (2011), dan Sung Chul tidak (2011), dan menggunakan data bulanan 2001-2012, model PPP yang diuji. Hasil Statistik menunjukkan bahwa PPP tidak jelas dalam hubungan antara Indonesia ekonomi dan tiga mitra dagang utama. Tiga mitra dagang utama Indonesia adalah AS, Jepang, dan negara-negara Eropa. Salah satu kemungkinan penyebab masalah adalah kebijakan pemerintah Indonesia untuk menekan tingkat suku bunga tidak mudah menjadi diadopsi oleh pasar. Introducing ECM, the cointegration of real exchange rate of the three major trading partner and the influencing factors are tested. The influencing factors are interest, price, economic growth differential, and economic shock which is represented by oil price. It is found out that there are cointegration among them. Yen and US dollar are most elastic to price differential, since Euro is most elastic to interest differential. During the period of political succession or general election, the exchange rate tends to fluctuate heavily.