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Real Exchange Rate Misalignment and Currency Crises

Author

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  • Unggul Heriqbaldi
  • Wahyu Widodo
  • Dian Ekowati

Abstract

This article calculates the real exchange rate misalignment (RERM) of the rupiah to examine the role of misalignment in exchange rate crises in Indonesia. The article does this by employing an autoregressive regime-switching model and behavioural equilibrium exchange rate (BEER) approach. The findings are as follows. First, net foreign assets and the relative productivity differential between sectors significantly influence the equilibrium exchange rate, indicating that external and internal balance determine the behaviour of the rupiah in the long run. Second, the BEER approach can properly predict misalignment of the rupiah, especially through explaining the overvaluation periods of the rupiah before the Asian financial crisis. The regime switching model performs well in identifying episodes of stability and volatility in the rupiah. Third, of the 17 crisis episodes experienced in Indonesia in 1981–2012, 10 were preceded by high RERM.

Suggested Citation

  • Unggul Heriqbaldi & Wahyu Widodo & Dian Ekowati, 2020. "Real Exchange Rate Misalignment and Currency Crises," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 56(3), pages 345-362, September.
    • Handle: RePEc:taf:bindes:v:56:y:2020:i:3:p:345-362
    DOI: 10.1080/00074918.2019.1662885
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    Cited by:

    1. Prabheesh, K.P. & Prakash, Branesh & Vuniivi, Viliame, 2023. "Assessment of Fiji’s exchange rate," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1282-1305.
    2. Unggul Heriqbaldi & Miguel Angel Esquivias & Rossanto Dwi Handoyo & Alfira Cahyaning Rifami & Hilda Rohmawati, 2022. "Exchange rate volatility and trade flows in Indonesia and ten main trade partners: asymmetric effects," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 40(4), pages 708-739, October.
    3. Mohammad Hassanzadeh & Shahla Mousavi, 2023. "Real effective exchange rate misalignment and currency crisis in Iran," Future Business Journal, Springer, vol. 9(1), pages 1-8, December.
    4. Michael Takudzwa Pasara & Vincent Mugwira, 2023. "Exchange Rate (MIS-) Alignment: An Application of the Behavioural Equilibrium Exchange Rate (beer) Approach to Zimbabwe (1990-2018)," International Journal of Economics and Financial Issues, Econjournals, vol. 13(5), pages 128-141, September.

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