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

摘要

Since the appearance of persistent research finding a disconnection between the exchangerate and its macroeconomic fundamentals, the empirical debate has not stopped. Studies employvarious methods to explain the presence of the exchange rate disconnect puzzle, including applyingmodels to the case of emerging market economies. However, the exchange rate has differentdeterminants in some countries. To revisit this puzzle in an emerging market currency, we analyzedthe cointegration of the exchange rate of the Indonesian Rupiah vis-á-vis currencies of primarytrade partners and its macroeconomic fundamentals. The empirical results based on AutoregressiveDistributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) models show thatthe fundamental variables consistently drive the exchange rate. The trade surplus as an extendednonlinear variable revealed high feedback to the exchange rate volatility in the long-run.