Exchange rate pass through viewed from wholesale price in Indonesia

Abstract

This paper explores the effect of changes in exchange rates on domestic prices, known as Exchange Rate pass Through. The data used in this study are data on the economy in Indonesia in the period 1997.3 to 2017.4. The analytical tool used is multiple regression with the Error Correction model approach. Based on the results of the analysis conducted shows that the effect of the exchange rate on the wholesale price index in the long run is greater than the short run. This shows that the effect of the exchange rate on domestic prices is indirect.The foreign interest rates variabel effect to wholesale price index in the long term, while the domestic interest rates effect in the short and long term. The effect of foreign prices on the wholesale price index is much larger in the short than in the long-term. Meanwhile, the variable of foreign capital in both the short and long-term, it has a positive and significant effect on the wholesale price index.The effect domestic capital variable is different from the ones on foreign capital because in the short term the domestic capital was not significant to the wholesale price index. The effect of domestic capital on the wholesale price index was positive and significant in the long term.The effect of foreign and domestic capitals in the long term on the wholesale price was positive. It suggests that foreign and domestic capital did not substitute each other, but they were complementary.