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A Regime Switching Analysis Of Indonesia'S Exchange Market Pressure

Author

Listed:
  • UNGGUL HERIQBALDI

    (Faculty of Economics and Business, Airlangga University, Airlangga 4, Surabaya, East Java 60286, Indonesia)

  • MUNAWAR ISMAIL

    (Faculty of Economics and Business, Brawijaya University, Mayjen Haryono 165, Malang 65145, Indonesia)

  • DAVID KALUGE

    (Faculty of Economics and Business, Brawijaya University, Mayjen Haryono 165, Malang 65145, Indonesia)

  • DWI BUDI SANTOSO

    (Faculty of Economics and Business, Brawijaya University, Mayjen Haryono 165, Malang 65145, Indonesia)

Abstract

This paper examines the extent to which the Indonesia's currency crisis can be accounted for by macro and micro economic fundamentals by employing Markov-switching approach under cross-generation crisis models. In order to represent the speculative attack in the economy, the study utilized one of the measures that is most widely adopted to signal the breakup of a crisis, the Exchange Market Pressure Index (EMPI). This paper found the following. First, liquidity (DC), real exchange rate (RER2) and ratio of banking credit to GDP (BCred) were found to significantly influence the EMPI, indicating that the behavior of EMPI has the characteristic that is predicted by the first, second, and third generation of crisis model found to significantly influence the EMPI, indicating that the behavior of EMPI has the characteristic that is predicted by the first, second and third generation of crisis models. Second, the LR test showed that regime switching dynamic model is more robust than ordinary dynamic model in explaining the EMPI, suggesting that speculative attacks tend to have the characteristics of multiple equilibria. Third, the transition probability matrix results showed that the tranquility regime was more persistent than the volatile regime.

Suggested Citation

  • Unggul Heriqbaldi & Munawar Ismail & David Kaluge & Dwi Budi Santoso, 2014. "A Regime Switching Analysis Of Indonesia'S Exchange Market Pressure," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 59(02), pages 1-17.
    • Handle: RePEc:wsi:serxxx:v:59:y:2014:i:02:n:s0217590814500131
    DOI: 10.1142/S0217590814500131
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange market pressure; regime switching; currency crisis; money supply; credit; F30; F31; F33; E51;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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