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 tended to increase over the last 3 decades, which means that Indonesia's real exchange rate relative to other countries has experienced depreciation. Many studies on the relationship between exchange rates and the trade balance often use symmetric technique estimates as one of their main characteristics. In fact, this technique can provide biased empirical results. Therefore, it is possible that the impact of exchange rate changes on the trade balance is asymmetric. This research uses the Nonlinear Autoregressive Distributed Lag method over the period 2002 quarter 1 to 2023 quarter 4. The results show that in the long term there is an asymmetric effect on the exchange rate, where the impact of depreciation has a greater effect than appreciation. Long-term depreciation of the exchange rate has a negative impact that can disrupt domestic production and hamper export performance.

Keywords: Real Effective Exchange Rate, Trade Balance, NARDL

JEL Classification: F1, F4, C1