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Abstract

One barrier to a faster economic recovery is exchange rate volatility, which raises the need for appropriate exchange rate movement model. The fluctuation of the rupiah exchange rate versus the US dollar is examined in this study using a hybrid model, which combines microstructural and macroeconomic methodologies using ARDL approach. The results show that the hybrid model and exchange rate changes have a long-term and short-term relationship. Microstructural variables, specifically spreads and high-low spreads, are important in explaining exchange rates movements. Long-term effects of the money supply, net foreign assets, and interest rates on the macroeconomic system are negligible, except for price levels that can explain significant exchange rate movements. A hybrid model can be used to close the gap in macroeconomic relations in explaining exchange rates by incorporating microstructural elements.