THE INFLUENCE OF OIL PRICES ON INDONESIA’S EXCHANGE RATE
Keywords:
exchange rate, oil price, exchange rate regimes, Indonesia
Abstract
This study tests for a long-run relation between oil prices and the rupiah–US dollar
exchange rate. We discover, first, that the long-run cointegration relation between oil
prices and the real exchange rate (RER) is sensitive to different exchange rate regimes
in Indonesia. Second, we find a long-run cointegrating relation between oil prices and
the RER over the float exchange rate regime. However, in the managed float period,
there is no evidence of a long-run relation between oil prices and the RER. In the long
run, higher oil prices lead to an appreciation of the rupiah against the US dollar in the
float period (post-August 1997 period). We demonstrate that these results are robust to
different data frequencies.
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References
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Narayan, S. (2013). Foreign Exchange Rate Market and Oil Prices in Asia. Journal of
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rate and inflation? Bulletin of Monetary Economics and Banking. Forthcoming.
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Narayan, P., Popp, S. (2010). A new unit root test with two structural breaks in
level and slope at unknown time. Journal of Applied Statistics, 37, 1425-1438.
Pesaran M.H., Shin Y. (1995). Autoregressive distributed lag modelling approach
to cointegration analysis. DAE Working Paper Series No 9514, Department of
Economics, University of Cambridge.
Pershin, V., Molero, J. C., and de Garcia, F. P. (2016). Exploring the Oil Prices and
Exchange Rates Nexus in Some African Economies. Journal of Policy Modeling,
38, 166-180.
Queye, A.B., Mignon, V., and Penot, A. (2007). China and the Relationship between
Oil Price and the Dollar. Energy Policy, 35, 5795-5806.
Rolnick, A.J., and Weber, W.E ., (1997). Money, Inflation, and Output under Fiat
and Commodity Standards. Journal of Political Economy, 105, 1308-21.
Simorangkir, I., and Suseno. (2014). Exchange Rate System and Policies, Seri
Kebanksentralan No.12. Bank Indonesia : Pusat Pendidikan dan Studi
Kebanksentralan (PPSK).
Yeyati, E. L., and Sturzenegger, F., (2003). To Float or to Fix : Evidence on the
Impact of Exchange Rate Regimes on Growth. The American Economic Review,
93, 1173-1193.
US Real Exchange Rate. Journal of International Money and Finance, 17, 299–316.
Basher, S. A., Haug, A. A., and Sadorsky, P. (2012). Oil Prices, Exchange Rates and
Emerging Stock Markets. Energy Economics, 34, 227–240.
Camarero, M., and Tamarit, C. (2002). Oil Prices And Spanish Competitiveness: A
Cointegrated Panel Analysis, Journal of Policy Modeling, 24, 591–605.
Chen, S. S., and Chen, H. C. (2007). Oil Prices and Real Exchange Rates. Energy
Economics, 29, 390–404.
Corden, W.M. (1984). Booming Sector and Dutch Disease Economics: Survey and
Consolidation, Oxford Economic Papers, 35, November, 359–80.
De Grauwe, P. (1996). International Money: Post War – Trends and Theories.
Oxford: Oxford University Press.
Engle, R. F., and Granger, C. W. J. (1987). Cointegration and Error Correction:
Representation, Estimations and Testing, Econometrica, 55, 251-276.
Ghosh, A., Guide, A.M., Ostry, J., and Wolf, H., (1997). Does the Nominal Exchange
Rate Matter? National Bureau of Economic Research (Cambridge, MA) Working
Paper No. 5874.
Gulab, S. 1983. International Money: Post War – Trends and Theories. Oxford, Oxford
University Press.
Husain, AM, Moody, A., and Rogoff, K. S. (2005). Exchange Rate Regime Durability
and Performance in Developing versus Advanced Economy. Journal of Monetary
Economics.
Johansen, S. (1988). Statistical Analysis of Cointegration Vectors. Journal of Economic
Dynamics and Control, 12, 231-254.
Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors
in Gaussian Vectors in Gaussian Vector Autoregressive models. Econometrica,
59, 1551–1580.
Johansen, S. (1995). Likelihood-Based Inference in Cointegrated Vector Autoregressive
Models. New York: Oxford University Press.
Krugman, P. (1983). Oil shocks and exchange rate dynamics, In J. A. Frenkel
(Ed.) Exchange rates and International Macroeconomics, 259-284. Chicago:
University of Chicago Press.
Lizardo, R. A., and Mollick, A.V. (2010). Oil Price Fluctuations and US Dollar
Exchange Rate. Energy Economics, 32, 399–408.
Ministry of Energy and Mineral Resources (MEMR). (2013). Ministry of Energy
and Mineral Resources (MEMR) Regulation Number 07/2013.
Mundell, R. (1995). Exchange Rate Systems and Economic Growth. Rivista di
Politica Economica, 85, 1-36.
Narayan, S. (2013). Foreign Exchange Rate Market and Oil Prices in Asia. Journal of
Asian Economics, 28, 41-50.
Narayan, S., Sahminan, S. (2019). Has FinTech influenced Indonesia’s exchange
rate and inflation? Bulletin of Monetary Economics and Banking. Forthcoming.
Narayan, P., Narayan, S., Rahman, R. E., and Setiawan, I. (2019). Bitcoin Price
Growth and Indonesia’s Monetary System. Emerging Markets Review.
Forthcoming.
Narayan, P., Popp, S. (2010). A new unit root test with two structural breaks in
level and slope at unknown time. Journal of Applied Statistics, 37, 1425-1438.
Pesaran M.H., Shin Y. (1995). Autoregressive distributed lag modelling approach
to cointegration analysis. DAE Working Paper Series No 9514, Department of
Economics, University of Cambridge.
Pershin, V., Molero, J. C., and de Garcia, F. P. (2016). Exploring the Oil Prices and
Exchange Rates Nexus in Some African Economies. Journal of Policy Modeling,
38, 166-180.
Queye, A.B., Mignon, V., and Penot, A. (2007). China and the Relationship between
Oil Price and the Dollar. Energy Policy, 35, 5795-5806.
Rolnick, A.J., and Weber, W.E ., (1997). Money, Inflation, and Output under Fiat
and Commodity Standards. Journal of Political Economy, 105, 1308-21.
Simorangkir, I., and Suseno. (2014). Exchange Rate System and Policies, Seri
Kebanksentralan No.12. Bank Indonesia : Pusat Pendidikan dan Studi
Kebanksentralan (PPSK).
Yeyati, E. L., and Sturzenegger, F., (2003). To Float or to Fix : Evidence on the
Impact of Exchange Rate Regimes on Growth. The American Economic Review,
93, 1173-1193.
Published
2019-02-28
How to Cite
Narayan, S., Falianty, T., & Tobing, L. (2019). THE INFLUENCE OF OIL PRICES ON INDONESIA’S EXCHANGE RATE. Buletin Ekonomi Moneter Dan Perbankan, 21(3), 303-322. https://doi.org/10.21098/bemp.v21i3.1007
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
