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Foreign Exchange Expectations in Indonesia: Regime Switching Chartists & Fundamentalists Approach

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  • Ferry Syarifuddin

    (Bank Indonesia)

  • Noer Azam Achsani
  • Dedi Budiman Hakim
  • Toni Bakhtiar

Abstract

This paper investigates the effect of central bank intervention using a heterogeneous expectations exchange rate model. We apply Markov switching approach on daily USD/IDR exchange rate, intervention data of Bank Indonesia, from 2006 to 2012. The results support both chartists and fundamentalist regimes, and confirm the two regimes to be persistent. Moreover, the intervention of Bank Indonesia on foreign exchange is capable to drive the USD/IDR to its fundamentalist rule. However, on Bank Indonesia efforts to exert a stabilizing effect of foreign exchange interventions, the result is inconclusive.

Suggested Citation

  • Ferry Syarifuddin & Noer Azam Achsani & Dedi Budiman Hakim & Toni Bakhtiar, 2014. "Foreign Exchange Expectations in Indonesia: Regime Switching Chartists & Fundamentalists Approach," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 17(2), pages 1-24, October.
    • Handle: RePEc:idn:journl:v:17:y:2014:i:2:p:1-24
    DOI: 10.21098/bemp.v17i2.49
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    References listed on IDEAS

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    1. Westerhoff, Frank, 2003. "Speculative markets and the effectiveness of price limits," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 493-508, December.
    2. Vigfusson, Robert, 1997. "Switching between Chartists and Fundamentalists: A Markov Regime-Switching Approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 291-305, October.
    3. Perry Warjiyo, 2013. "Indonesia: stabilizing the exchange rate along its fundamental," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 177-187, Bank for International Settlements.
    4. Manzan, Sebastiano & Westerhoff, Frank, 2005. "Representativeness of news and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 677-689, April.
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    Cited by:

    1. Naufa, Ahmad Maulin & Lantara, I Wayan Nuka & Lau, Wee-Yeap, 2019. "The impact of foreign ownership on return volatility, volume, and stock risks: Evidence from ASEAN countries," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 221-235.

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    More about this item

    Keywords

    Exchange rates; foreign-exchange intervention; switching regression;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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