DETERMINANT OF RUPIAH EXCHANGE RATE AND MISALIGNMENT (2000-2018)

Abstract

This study aims to analyze the determinants of rupiah exchange rate and explain the amount of currency misalignment. The variables used in this study are real equilibrium exchange rate, terms of trade, net foreign assets, relative price of non-traded to traded goods, trade openness and real interest rate differential. This study uses the Behavioral Equilibrium Exchange Rate (BEER) approach to estimate the rupiah equilibrium value quarterly over the period 2000-2018. The method used in this study is Error Correction Model (ECM). The results of the study found that variables that are significant determinants of long-run equilibrium exchange rates are net foreign assets and terms of trade, while in the short term are terms of traded and relative price of non- traded to traded goods. Based on the estimation of currency misalignment, it was concluded that the rupiah tended to approach equilibrium exchange rates during the study period. In 2001Q2 was the highest undervalued period -13.51% , while the 2006Q1 period showed the highest overvalued 13%. The findings of this study indicate that the rupiah is still vulnerable to undervaluation shocks.