Estimating Equilibrium Real Exchange Rates of the Rupiah

Sahminan, Sahminan (2005): Estimating Equilibrium Real Exchange Rates of the Rupiah.

Abstract

In this paper we estimate equilibrium real exchange rate of the rupiah. Using quarterly data from 1993:Q1 to 2005:Q2, we find that productivity differential, terms of trade, and net foreign assets significantly determine the long-run equilibrium real exchange rate of the rupiah. In the short run, the change in the equilibrium real exchange rate is significantly determined by terms of trade, productivity differentials, net foreign assets, inflation differentials, and interest rate differentials. Based on the estimates of the equilibrium real exchange rate we find that in the period shortly before the 1997’s crisis, the actual real exchange rate of the rupiah overvalued substantially relative the equilibrium real exchange rate, and since 2004 the rupiah tends to overvalue, but to the extent that lower than the overvaluation before the crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Equilibrium Real Exchange Rate, Misalignment, Indonesian Rupiah
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Alamsyah, H. et al. (2000). “Keseimbangan Nilai Tukar Jangka Panjang: Penilaian dengan Pendekatan Fundamental Equilibrium Exchange Rate”, Bank Indonesia, Direktorat Riset Ekonomi dan Kebijakan Moneter, mimeo.

Black, S.W. (1994). “On the Concept and Usefulness of the Equilibrium Rate Of Exchange” in Estimating Equilibrium Exchange Rates (Williamson, J., ed.). Washington, D.C.: Institute for International Economics.

Chinn, M.D. (1997). “The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates.” mimeo.

Driver, R.L. and Westaway P.F. (2004). “Concepts of Equilibrium Exchange Rates.” Bank of England. mimeo.

Feyzioğlu, T. (1997). “Estimating the Equilibrium Real Exchange Rate: an Application to Finland.” IMF Working Paper, No. WP/97/109.

Hallwood, P.C. and MacDonald, R. (2000). International Money and Finance. Oxford: Blackwell Publishers.

Lerner, A. (1944). The Economics of Conrtrol. New York: Macmillan.

Marshall, A. (1923). Money, Credit and Commerce. Basingstoke: Macmillan.

Obstfeld, M., and Rogoff, K. (1996). Foundation of International Macroeconomics. Cambridge: MIT Press.

Williamson, J. (1994). Estimating Equilibrium Exchange Rates. Washington, D.C.: Institute for International Economics.