EXCHANGE MARKET PRESSURE IN INDONESIA: A UNIVARIATE MARKOV SWITCHING ANALYSIS

Journal Title: Asian Economic and Financial Review - Year 2012, Vol 2, Issue 5

Abstract

The aim of this paper is to analyze the nature of exchange market pressure in the case of the Indonesian economy. More specifically, this paper aims to answer whether there is non-linearity or multiple equilibria in the EMPI. The paper relies on a univariate Markov Switching autoregressive model. The model estimation also incorporates procedures such as unit root test, diagnostic test and log likelihood ratio test, focusing on the period from January 1990 to September 2008. This paper found that a 2-state Markov switching AR(6) model of EMPI outperforms a linear autoregressive model in explaining the behavior of EMPI. The findings also suggest that the significant regime dependent intercept confirms the existence of a multiple-equilibria condition in the EMPI. The degree of uncertainty of EMPI in a volatile state was found to be much higher than in the stable state and there was also an inertia characteristic. Due to the inertia characteristic in the EMPI, the monetary authority should take into account the role of economic agents’ expectations in delivering monetary policy to stabilize the exchange rate following significant market pressure in the economy. This paper contributes by providing empirical evidence on the characteristics of EMPI in the context of the Indonesian economy.

Authors and Affiliations

Unggul Heriqbaldi| Department of Economics Faculty of Economics and Business Airlangga University Jl. Airlangga No. 4, Surabaya, Jawa Timur 60286, Indonesia

Keywords

Related Articles

Economic Freedom Verses Economic Growth: Cross Countries Analysis in the form of ARDL Approach

The generous theoretical and empirical debates are available on institutionalfreedom and economic growth, but unsuccessful to facilitate stationaryconclusion regarding the nature of connection. It is still confusing that...

MONETARY UNCERTAINTY AND DEMAND FOR MONEY IN KOREA

Friedman’s volatility hypothesis asserts that increased volatility of money supply can lower the velocity of money or increase the demand for money. Previous studies have tested this hypothesis by using data from a few i...

AN EMPIRICAL INVESTIGATION INTO THE RELATIONSHIP BETWEEN FINANCIAL SECTOR DEVELOPMENT AND UNEMPLOYMENT IN NIGERIA

Financial sector development has been identified by financial economists as a veritable way of empowering the poor thereby paving the way for enabling them to become employed and possibly serve as economic agents of chan...

ECONOMIC AND SOCIAL DUALITY IN IRAN (USING FUZZY TOPSIS DECISION-MAKING)

One of the planners and policy-makers? aims on the one hand is optimum allocating and distributing of credits and facilities among regions and on the other hand is providing and compiling a suitable model aiming at achie...

TRANSACTION COSTS, MULTIPLE EQUILIBRIA, AND THE MUNDELL PROPOSITION

This paper inserts Coase (1937) assertion into Mundell (1963) model. That is, investigating the robustness of Mundell (1963) proposition with the consideration of transaction costs in the labor market. The result shows t...

Download PDF file
  • EP ID EP1810
  • DOI -
  • Views 542
  • Downloads 33

How To Cite

Unggul Heriqbaldi (2012). EXCHANGE MARKET PRESSURE IN INDONESIA: A UNIVARIATE MARKOV SWITCHING ANALYSIS. Asian Economic and Financial Review, 2(5), 603-616. https://europub.co.uk./articles/-A-1810