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Overshooting Indonesian Rupiah's Exchange Rate towards US Dollar: Dornbusch Model Hypotheses Test

Author

Listed:
  • I Made Suidarma

    (Department of Management, University of Pendidikan Nasional Denpasar, Indonesia,)

  • I Gede Sanica

    (Department of Management, University of Pendidikan Nasional Denpasar, Indonesia,)

  • Putu Cita Ayu

    (Department of Accounting, University of Hindu Indonesia Denpasar, Indonesia,)

  • I Gusti Nengah Darma Diatmika

    (Department of Economics, University of Tabanan, Indonesia)

Abstract
The study aims at identifying the determinants of overshooting Indonesian Rupiah's exchange rate towards US Dollar and testing Dornbusch model hypothesis. The data applied are Indonesia monthly time series data in the period of 2010.1 2017.12. The Data source is Financial Economy Statistics of Indonesia from the Central Bank of Indonesia. The analysis method used is dynamic Vector Error Correction Model (VECM). Several variables employed are exchange rate, inflation level, economy growth, interest rate policy, money supplies and international interest rate. The result shows that in long term, money supply variable or monetary aggregate has negative relation to exchange rate movement in which the increase of money supply or monetary aggregate causes exchange rate depreciation. Short term shock does not affect exchange rate significantly. Dornbusch hypothesis on overshooting of exchange rate did not occur in Indonesia during the observation period.

Suggested Citation

  • I Made Suidarma & I Gede Sanica & Putu Cita Ayu & I Gusti Nengah Darma Diatmika, 2018. "Overshooting Indonesian Rupiah's Exchange Rate towards US Dollar: Dornbusch Model Hypotheses Test," International Journal of Economics and Financial Issues, Econjournals, vol. 8(5), pages 52-58.
    • Handle: RePEc:eco:journ1:2018-05-8
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    References listed on IDEAS

    as
    1. Carlos Capistrán & Daniel Chiquiar & Juan R. Hernández, 2019. "Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico," International Journal of Central Banking, International Journal of Central Banking, vol. 15(5), pages 207-254, December.
    2. Chien-Chung Nieh & Yu-Shan Wang, 2005. "ARDL Approach to the Exchange Rate Overshooting in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 25(1), pages 55-71, August.
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    6. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: a Quantitative Investigation," Cahiers de recherche 9614, Universite de Montreal, Departement de sciences economiques.
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    8. Pratomo, Wahyu Ario, 2005. "Exchange Rate of Indonesia: Does Rupiah Overshoot?," MPRA Paper 7381, University Library of Munich, Germany.
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    More about this item

    Keywords

    Dornbush Overshooting; Exchange Rate; Fundamental Macroeconomic; VECM;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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