EXCHANGE MARKET PRESSURE IN INDONESIA: A UNIVARIATE MARKOV SWITCHING ANALYSIS

Journal Title: Asian Economic and Financial Review - Year 2012, Vol 2, Issue 5

Abstract

The aim of this paper is to analyze the nature of exchange market pressure in the case of the Indonesian economy. More specifically, this paper aims to answer whether there is non-linearity or multiple equilibria in the EMPI. The paper relies on a univariate Markov Switching autoregressive model. The model estimation also incorporates procedures such as unit root test, diagnostic test and log likelihood ratio test, focusing on the period from January 1990 to September 2008. This paper found that a 2-state Markov switching AR(6) model of EMPI outperforms a linear autoregressive model in explaining the behavior of EMPI. The findings also suggest that the significant regime dependent intercept confirms the existence of a multiple-equilibria condition in the EMPI. The degree of uncertainty of EMPI in a volatile state was found to be much higher than in the stable state and there was also an inertia characteristic. Due to the inertia characteristic in the EMPI, the monetary authority should take into account the role of economic agents’ expectations in delivering monetary policy to stabilize the exchange rate following significant market pressure in the economy. This paper contributes by providing empirical evidence on the characteristics of EMPI in the context of the Indonesian economy.

Authors and Affiliations

Unggul Heriqbaldi| Department of Economics Faculty of Economics and Business Airlangga University Jl. Airlangga No. 4, Surabaya, Jawa Timur 60286, Indonesia

Keywords

Related Articles

RENMINBI AS NUMBER TWO IN EAST ASIA

This paper investigates the emerging influence of the Chinese renminbi on the exchange rate movements of East Asian currencies. China stopped pegging her currency to the US dollar and moved into a managed floating exchan...

Vulnerability of Southern Mediterranean Countries to Exogenous Shocks: Structural VAR Approach

All statistics and empirical studies relating to the Mediterranean region show the irregular fluctuation of the main macroeconomic aggregates. It is appear that the vulnerability of these countries is largely the result...

TRADE OPENNESS AND GROWTH IN DEVELOPING COUNTRIES: AN ANALYSIS OF THE RELATIONSHIP AFTER COMPARING TRADE INDICATORS

The paper demonstrates that trade policy liberalization have weakly contributed in improving economic growth in 82 developing countries two years after the Uruguay round and until 2012. The assertion is preceded by a tra...

THE PATTERNS AND DETERMINANTS OF AGRICULTURAL CREDIT USE AMONG FARM HOUSEHOLDS IN OYO STATE, NIGERIA

The study examined the patterns and determinants of agricultural credit use among farming households in Oyo State, Nigeria. The primary data used for the study were obtained from a cross sectional survey of 114 farm hous...

THE FISHER EFFECT IN THE SPANISH CASE: A PRELIMINARY STUDY

We revise previous literature about Fisher Effect, in order to check if the majority of nominal interest rates movements are caused by inflation rate fluctuations, remaining constant the real interest rate. Finally, we a...

Download PDF file
  • EP ID EP1810
  • DOI -
  • Views 502
  • Downloads 33

How To Cite

Unggul Heriqbaldi (2012). EXCHANGE MARKET PRESSURE IN INDONESIA: A UNIVARIATE MARKOV SWITCHING ANALYSIS. Asian Economic and Financial Review, 2(5), 603-616. https://europub.co.uk/articles/-A-1810