Indonesian rupiah still shows volatility even after other Asean currencies return to stability after sharp depreciation during the 1997 currency turmoil. The macroeconomic fundamentals are not yet sound and may cause the Indonesian currency at any time. This paper presents a dynamic time series analysis of interrelations between Indonesian rupiah exchange rate and GDP and real money supply. By applying VAR, the analysis uses variance decomposition and Granger causality tests to observe the effects of one endogenous variable on another and which variable's innovation shock accounts most for the volatility of the currency and dynamic movements of these variables are then explained. The findings show that the lags of the real money supply significantly influence the depreciation of rupiah, while the lags of GDP significantly influence the appreciation of rupiah. The rupiah exchange rate is, for the most part, influenced by the erratic movements of itself. The Granger causality runs in both directions. Macro policies that can promote real economic activities, rather than frequent monetary instruments, contribute to the strengthening of rupiah in the long-run.
Riswandi, N. &. (n.d.). Analisis Dinamik VAR dan Variance Decomposition.