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

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.

Dynamic Model of The Impact of Macro Indicators and Islamic Monetary Policy Instruments on The Dual Banking System

“…In several theories, such as that revealed by Chouwdury (2005) that the financial aspect (monetary) with real economic conditions in Previous researchers have done a lot of analysis and concept development on how data macroeconomic factors become a forecasting medium in regulating the growth and stability of a country's economy, such as examining the relationship and relationship between the capital market or stock market and economic growth (Cave et al, 2020;Coşkun et al, 2017;Ho, 2018;Muharam et al, 2019;Nathaniel et al, 2020;Nguyen & Bui, 2019;Oprea & Stoica, 2018;Osaseri & Osamwonyi, 2019 ;Pradhan, 2018), inflation and economic growth (Abuoliem et al, 2019;Agbonlahor, 2014;Balk et al, 2020;Bayuni & Srisusilawati, 2018;Denbel et al, 2016;Fountas et al, 2002;Oliinyk et al, 2020;A. Uddin et al, 2019;Ullah et al, 2020), as well as currency exchange rates and economic growth (Babubudjnauth, 2020;Chan et al, 2019;Feriyantoa, 2020;Mlambo, 2020;Oliinyk et al, 2020;Park, Ryu, & Lee, 2019).…”

Current Account Determinants in Jordan: An ARDL Approach

“…Fayaz & Sandeep (2016 tried to enrich the existing literature on the trends, patterns and determinants of CAD in India since 1996Q2 to 2013Q4. Feriyantoa (2020) investigated the relationship between exchange rate, domestic Money Supply, real GDP, and FDI on Indonesia's CAB in the short and long term during the period 2000-2017.…”

“…Almost all the literature support the twin deficit phenomenon, that is, the CA deficit and fiscal deficit are notably tied. According to the investment channels, many indicators have been used in the literature; Aristovnik (2007) used the total investment, Brissimis et al, (2012) used the private investment, while Ariyani et al, (2018) and Feriyantoa (2020) used the FDI. The results show that investment variables have negative effects on the CA movements, as the literature assent.…”

“…The financial factors are used to enhance the regression fitness such money supply, Net Foreign Assets (NFA) and reserve changes. Aristovnik (2007) and Feriyantoa (2020) used the money supply, Chinn & Prasad (2003), Morsy (2012), andFayaz &Sandeep (2016) used the NFA, while Phillips et al, ( 2013) used reserve changes. The literature show that increasing NFA or foreign reserves will lead to the betterment of the CA performance.…”