The Impact of the Real Effective Exchange Rate on Indonesia's Trade Balance: A Nonlinear Autoreggresive Distributed Lag (NARDL) Approach

Abstract

Indonesia's real effective exchange rate has shown an upward trend over the past three 
decades. This condition indicates a weakening price competitiveness of Indonesian products 
in the international market, potentially impacting the dynamics of bilateral trade in the long 
term. This variable indicates the real exchange rate against all trading partners, adjusted for 
price levels between countries. Many studies on the relationship between exchange rates and 
the trade balance often use symmetric techniques, as is common in economic modeling. 
However, this technique can produce biased empirical results because changes in a variable 
in the real world are often asymmetric. This study uses the Nonlinear Autoregressive 
Distributed Lag method for the period 2002 Q1 to 2023 Q4. The estimation results show that 
in the long run, there is an asymmetric effect on the exchange rate in Indonesia, where the 
impact of real depreciation has a greater influence than real appreciation. This indicates that 
real depreciation in the long term has a negative impact that can disrupt domestic production 
and hinder export performance. 

Keywords: Real Effective Exchange Rate, Trade Balance, NARDL 
JEL Classification: F1, F4, C1