Vol 7, No 1 (2019)

Analysis of exchange rate of the balance of payment approach using autoregressive method

Tony Seno Aji, Hendry Cahyono, Ach. Yasin

Abstract

Fluctuations in currency exchange rates will affect the economy, including international trade activities, inflation, capital flows, and interest rates. Seeing the magnitude of the impact of fluctuations in the exchange rate of the economy, it is very important to examine the factors that affect the exchange rate. The factors that influence the exchange rate according to the balance of payment approach include inflation, interest rates and output. The data analysis technique used is the autoregressive method. The results of this study are: (1) inflation affects the rupiah exchange rate against the dollar. The higher the inflation, the higher the rupiah exchange rate, which means that the rupiah exchange rate weakens. The effect of Inflation on the exchange rate in this study is in accordance with the theory of Purchasing Power Parity; (2) the policy interest rate does not affect the rupiah exchange rate against the dollar during the observation period. The movement of the exchange rate is very dynamic and is influenced by various factors. In addition to the big players and financial institutions, the influence of fundamental factors and external factors also plays a role in moving the market; (3) output growth does not affect the rupiah exchange rate against the dollar. The insignificance of the effect of output growth on the exchange rate may be another variable that is very dominant affecting the exchange rate or it can also be because there is a lag between output growth and the rupiah exchange rate. The dominant variable affecting the exchange rate is the inflation rate and the historical data exchange rate (t-1). Historical data from exchange rates can form expectations of society and ultimately in real terms affect the exchange rate.

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Keywords

Autoregressive, Balance of Payment Approach, Exchange Rate, Inflation.

Publication information

Volume 7, Issue 1
Year of Publication: 2019
ISSN: 1857 - 8721
Publisher: EDNOTERA

How to cite

Aji, T.S., Cahyono, H., Yasin, A.: Analysis of exchange rate of the balance of payment approach using autoregressive method. Journal of Applied Economics and Business, Vol 7, No. 1, 76-85. (2019)