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A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-á-vis Currencies of Primary Trade Partners

School of Economics, Northeast Normal University, Changchun 130024, China
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J. Risk Financial Manag. 2019, 12(2), 87; https://doi.org/10.3390/jrfm12020087
Received: 28 February 2019 / Revised: 21 April 2019 / Accepted: 25 April 2019 / Published: 13 May 2019
(This article belongs to the Special Issue Currency Crisis)
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Abstract

Since the appearance of persistent research finding a disconnection between the exchange rate and its macroeconomic fundamentals, the empirical debate has not stopped. Studies employ various methods to explain the presence of the exchange rate disconnect puzzle, including applying models to the case of emerging market economies. However, the exchange rate has different determinants in some countries. To revisit this puzzle in an emerging market currency, we analyzed the cointegration of the exchange rate of the Indonesian Rupiah vis-á-vis currencies of primary trade partners and its macroeconomic fundamentals. The empirical results based on Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) models show that the fundamental variables consistently drive the exchange rate. The trade surplus as an extended nonlinear variable revealed high feedback to the exchange rate volatility in the long-run. View Full-Text
Keywords: cointegration; exchange rate disconnect puzzle; macroeconomic fundamentals; emerging market economies; NARDL; trade balance cointegration; exchange rate disconnect puzzle; macroeconomic fundamentals; emerging market economies; NARDL; trade balance
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Salim, A.; Shi, K. A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-á-vis Currencies of Primary Trade Partners. J. Risk Financial Manag. 2019, 12, 87.

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