IDEAS home Printed from https://ideas.repec.org/a/ssi/jouesi/v7y2020i4p3410-3425.html
   My bibliography  Save this article

Determinants of the Indonesia's current account balance: an error correction model approach

Author

Listed:
  • Nur Feriyantoa

    (Islamic University of Indonesia, Indonesia)

Abstract

This study aims to investigate the relationship between exchange rate, Domestic Money Supply (M2), real Gross Domestic Product (GDP), and Foreign Direct Investment (FDI) on Indonesia’s current account balance (CAB) in the short and long term. For the purpose of this study, the Error Correction Model (ECM) is used. It uses data during the period 2000-2017. The result showed that (a) M2, real GDP, and FDI in the short-term have not significant effect on Indonesia’s current account but exchange rate has a significant negative effect; (b) in the long-term exchange rate, M2, and real GDP have not significant effect on Indonesia’s CAB, while FDI has a negative significant effect on Indonesia’s CAB. Policy recommendation for government as an implication of this study (a) stabilize the exchange rate in order to decrease current account deficit (CAD); (b) improve the investment climate and issue incentive policies for local investor; (c) increase the competitiveness of export-oriented products and reduce dependence on imports.

Suggested Citation

  • Nur Feriyantoa, 2020. "Determinants of the Indonesia's current account balance: an error correction model approach," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(4), pages 3410-3425, June.
    • Handle: RePEc:ssi:jouesi:v:7:y:2020:i:4:p:3410-3425
    DOI: 10.9770/jesi.2020.7.4(55)
    as

    Download full text from publisher

    File URL: https://jssidoi.org/jesi/uploads/articles/28/Feriyantoa_Determinants_of_the_Indonesias_current_account_balance_an_error_correction_model_approach.pdf
    Download Restriction: no
    File URL: https://jssidoi.org/jesi/article/594
    Download Restriction: no
    File URL: https://libkey.io/10.9770/jesi.2020.7.4(55)?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gnimassoun, Blaise & Mignon, Valérie, 2016. "How Do Macroeconomic Imbalances Interact? Evidence From A Panel Var Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 20(7), pages 1717-1741, October.
    2. Kamrul Hassan & Ariful Hoque & Ananth Rao, 2016. "Sustainability of Malaysian current account balance: Evidence from ardl bounds tests approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 50(5), pages 199-214, Special I.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhongdong Yu & Wei Liu & Liming Chen & Serkan Eti & Hasan Dinçer & Serhat Yüksel, 2019. "The Effects of Electricity Production on Industrial Development and Sustainable Economic Growth: A VAR Analysis for BRICS Countries," Sustainability, MDPI, vol. 11(21), pages 1-13, October.
    2. Alexandre Henry, 2019. "Monetary Union, Competitiveness and Raw Commodity Dependence: Insights from Africa," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(2), pages 285-301, June.
    3. Shibata, Akihisa & Shintani, Mototsugu & Tsuruga, Takayuki, 2019. "Current account dynamics under information rigidity and imperfect capital mobility," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 153-176.
    4. Claire Giordano, 2021. "How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(3), pages 365-404, July.
    5. Lena Dräger & Theoplasti Kolaiti & Philipp Sibbertsen, 2023. "Measuring macroeconomic convergence and divergence within EMU using long memory," Empirical Economics, Springer, vol. 65(5), pages 2333-2356, November.
    6. Tii N. Nchofoung, 2022. "Trade shocks and labour market resilience in Sub-Saharan Africa: Does the franc zone response differently?," International Economics, CEPII research center, issue 169, pages 161-174.
    7. Comunale, Mariarosaria, 2022. "A panel VAR analysis of macro-financial imbalances in the EU," Journal of International Money and Finance, Elsevier, vol. 121(C).
    8. Jorge Carrera & Blaise Gnimassoun & Valérie Mignon & Romain Restout, 2021. "Currency Misalignments and Exchange Rate Regimes in Latin American Countries: A Trade-Off Issue," Annals of Economics and Statistics, GENES, issue 141, pages 71-102.
    9. Schnücker, A.M., 2019. "Penalized Estimation of Panel Vector Autoregressive Models," Econometric Institute Research Papers EI-2019-33, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    10. Oguzhan Ozcelebi & Nurtac Yildirim, 2017. "Interrelations Between External and Internal Macroeconomic Factors: Empirical Evidence on Some OECD Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 15(2), pages 147-174.
    11. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," EconomiX Working Papers 2018-51, University of Paris Nanterre, EconomiX.
    12. Thi Anh-Dao Tran & Minh Hong Phi & Long Thai, 2020. "Global value chains and the missing link between exchange rates and export diversification," Post-Print halshs-02972341, HAL.
    13. Jawadi, Fredj & Rozin, Philippe & Bourghelle, David, 2023. "Insights into CO2 emissions in Europe in the context of COVID-19: A panel data analysis," International Economics, Elsevier, vol. 173(C), pages 164-174.
    14. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," Working Papers hal-04141675, HAL.
    15. Dessie Ambaw & Madhavi Pundit & Arief Ramayandi & Nicholas Sim, 2023. "Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific," Asian Economic Journal, East Asian Economic Association, vol. 37(2), pages 164-189, June.
    16. Amat Adarov, 2019. "Dynamic Interactions Between Financial and Macroeconomic Imbalances: A Panel VAR Analysis," wiiw Working Papers 162, The Vienna Institute for International Economic Studies, wiiw.
    17. Hyun-Jee Kim & Bongsuk Sung, 2020. "How Knowledge Assets Affect the Learning-by-Exporting Effect: Evidence Using Panel Data for Manufacturing Firms," Sustainability, MDPI, vol. 12(8), pages 1-14, April.
    18. Tran, Thi Anh-Dao & Phi, Minh Hong & Thai, Long, 2020. "Global value chains and the missing link between exchange rates and export diversification," International Economics, Elsevier, vol. 164(C), pages 194-205.
    19. Juan Carlos Cuestas & Javier Ordóñez & Karsten Staehr, 2019. "Unit labour costs and the dynamics of output and unemployment in the southern European crisis countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(3), pages 597-616, August.
    20. Polat, Tandogan, 2016. "Essays on banking sector’s dynamics, expectations, preferences and impact," Other publications TiSEM d064f029-f91e-47bc-b6d3-0, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    exchange rate; domestic money supply; real GDP; Foreign Direct Investment; Indonesia's current account;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssi:jouesi:v:7:y:2020:i:4:p:3410-3425. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Manuela Tvaronaviciene (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.