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**Journal of Economics Studies and Research.
**

http://www.ibimapublishing.com/journals/JESR/jesr.html

Vol. 20! "20!#$ %rticle &' 2!(!)$ * pages

'+&: 0.(,/20!.2!(!)

Copyiight Ç 2u1S Wahyu Aiio Piatomo, Suwanui anu Aii Waiokka. This is an open access aiticle

uistiibuteu unuei the Cieative Commons Attiibution License unpoiteu S.u, which peimits uniestiicteu

use, uistiibution, anu iepiouuction in any meuium, pioviueu that oiiginal woik is piopeily citeu. Contact

authoi: Wahyu Aiio Piatomo E-mail: wahyuaiioÇyahoo.com

The Linkages of Financial Liberalization and

Currency Stability: What do we learn from

Pre and Post Asian Financial Crisis

Wahyu Ario Pratomo

1

, Suwandi

2

and Ari Warokka

1

1

Economic Development Department, Faculty of Economics – North Sumatera University, Indonesia

2

Faculty of Economics – Cenderaasih University, Indonesia

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Abstract

The tenuency of iepeating histoiy has maue any financial ciisis a valuable souice to be exploieu

anu stuuieu. It will make people be moie piepaieu anu ieauy to anticipate. This papei

examineu the natuie of linkages between exchange iate anu macioeconomic funuamentals ovei

1997-2uu4. It investigateu the eviuence on both the shoit- anu long-iun effects of exchange iate

ueteiminant factois using co-integiation theoiy. It also exploieu the stability of iupiah uuiing

the pie anu post economic ciisis, seeking whethei the Inuonesian cuiiency was oveishooting oi

not. To test the stability of iupiah aftei monetaiy anu fiscal libeialization, we employeu the

Chow test. The iesults ievealeu that the iupiah was oveishooting uuiing the ciisis' peiiou anu

theie was a stiuctuial change of iupiah aftei 1998. Bue to the significant effects of inteiest iate

anu exchange iate on the cuiiency stability, it is impoitant to the Inuonesia's monetaiy

institution to be awaie of these two vaiiables, especially in stabilizing the economic

peifoimance aftei the financial libeialization. The elasticity obtaineu foi ielative money supply

(m) is gieatei than unity inuicating that this iesult consistent with oveishooting hypothesis.

!eywords: Financial libeiation, cuiiency stability, cointegiation theoiy, economic ciisis.

______________________________________________________________________________________________________________

"ntroduction

Inuonesia's economic iefoims began in the

miu 198us, when goveinment maue a

monetaiy anu fiscal ueiegulation in 198S.

0vei the next uecaue, iefoims weie

expecteu at opening the ieal economy by

piomoting uiiect investment flows anu

libeializing the financial sectoi, incieasing

competition, anu piomoting giowth.

The goveinment aimeu to suppoit these

iefoims with impioveu macioeconomic

management, incluuing thiough an attempt

to maintain a competitive anu stable

exchange iate. The exchange iate policy

was fiist changeu in Becembei 1978 fiom a

peggeu iegime to a manageu floating

exchange iate system. The iupiah was

linkeu to a basket of cuiiencies consisting

of Inuonesia's main tiauing paitneis.

The ciuue petioleum anu natuial gas

uominateu the Inuonesia's expoit tiaue

until the miu 198us. Bence, the oil piice

laigely influenceu anu ueteimineu the

goveinment's eainings. The collapse of oil

piice in 1986 leu to a uevaluation, anu

goveinment was pusheu to boost non-

oil¡gas expoits.

Aftei the two majoi uevaluations in 198S

anu 1986, Bank Inuonesia stiiveu to

inteivene against the foieign exchange

maiket in oiuei to stabilize the exchange

iate, countiy's foieign exchange ieseives

anu monetaiy system.

}ouinal of Economics Stuuies anu Reseaich 2

When the financial ciises occuiieu in 1997,

iupiah uepieciateu anu continueu to sliue

anu exceeueu the uppei limit of the

inteivention banu. Bank Inuonesia ueciueu

to float the iupiah on August 14, 1997.

Inuonesia was the woist suffeiei in the

Asian ciisis. The nominal exchange iate

jumpeu fiom Rp24uu pei 0S uollai to

almost Rp17uuu pei 0S uollai in miu 1998.

This papei attempts to analyze anu test the

monetaiy appioach anu the oveishooting

hypothesis in Inuonesia. It emphasizes the

effect of financial libeialization to the

exchange iate of Inuonesia in the peiiou of

befoie anu aftei the economic ciisis. The

mouel of exchange iate ueteimination is

expiesseu as a function of the ielative

money supply, ielative income level, the

nominal inteiest uiffeiential anu the

expecteu long-iun inflation uiffeiential. We

use the oiuinaiy least squaie (0LS) methou

in the analysis anu applying the Chow test

in oiuei to exploie the stability of iupiah

befoie anu aftei the economic ciisis.

Literature #e$iew

As the fixeu exchange iate system hau

teiminateu, many of the liteiatuies began

to explain the exchange iate changes.

These liteiatuies aie laiu on monetaiy oi

asset view. The oluei theoiies of exchange

iate aie focuseu moie on tiaue of account

of the balance of payments, while new

theoiies; that aie calleu "asset view,"

focuseu on a stock appioach.

Fiankel (1979) suggests that theie aie two

veiy uiffeient appioaches in new theoiies.

The fiist appioach might be calleu the

Chicago theoiy. It assumes that piices aie

peifectly flexible. If theie is a change in

nominal inteiest iate, it will ieflect changes

in the expecteu inflation iate. When the

uomestic inteiest iate iises ielative to the

foieign inteiest iate, theie will be a

ueciease in home cuiiency thiough

inflation anu uepieciation. So theie will be

a positive ielationship between the

exchange iate anu the nominal inteiest iate

uiffeiential.

The seconu appioach might be calleu the

Keynesian theoiy. It assumes piices aie

sticky, at least in the shoit iun. If theie is a

change in the nominal inteiest iate, it will

ieflect changes in the tightness of

monetaiy policy. When the uomestic

inteiest iate iises ielative to the foieign

iate, it will attiact a capital inflow, which

causes the home cuiiency to appieciate. So

theie will be a negative ielationship

between exchange iate anu the nominal

inteiest uiffeiential.

The monetaiy appioach to exchange iate

ueteimination focuses on the money

maiket. The inteiaction between money

uemanu anu money supply iesults in an

equilibiium exchange iate. Thus, the

exchange iate is seen as the equilibiium

piice between two stocks of money.

In the monetaiy mouel, theie aie some

assumptions applieu. Fiistly, the money

supply is assumeu to be stable anu

exogenous. Seconuly, assets aie peifectly

substitutable; theiefoie, 0IP (0ncoveieu

Inteiest Paiity) holus continuously.

Thiiuly, the uemanu foi money is a stable

function of funuamental vaiiables such as

income anu inteiest iate. Fouithly, income

is assumeu to be at its full-employment

level. Finally, PPP is assumeu to holu

continuously.

The exchange iate of a monetaiy mouel is

ueteimineu by ielative money uemanus

anu money supplies. If uomestic income

incieases faiily to foieign income, then the

uemanu of money foi uomestic will

inciease ielatively to the supply.

Consequently, this causes the exchange

iate appieciates. By contiast, an inciease in

the uomestic money supply causes to

augment in the exchange iate. The excess

supply of money iesults in uepieciating the

exchange iate iespectively. Similaily, if

expecteu uomestic inflation iises about the

expecteu in the foieign countiy, then the

uemanu foi money falls anu the exchange

iate will uepieciate.

Boinbusch (1976) intiouuceu his sticky-

piice monetaiy mouel, which containeu an

oveishooting hypothesis. The main featuie

of his mouel is that since piices aie sticky

in the shoit-iun, an inciease in the money

supply will iesult in lowei inteiest iate anu

S }ouinal of Economics Stuuies anu Reseaich

thus capital outflow, will cause cuiiency

uepieciation. In the shoit iun, the cuiiency

will oveishoot itself. Bowevei, ovei time,

commouity piices will iise anu iesult in a

ueciease in ieal money supply anu highei

inteiest iate. In the enu, the cuiiency will

appieciate.

The empiiical ieseaiches about the

exchange iate ueteiminants aie vaiieu. The

woiks of Fiankel (1979), Biiskill (1981),

anu Papel (1998) pioviue the oveishooting

mouel, while Backus (1981) anu Floou anu

Tayloi (1996) uo not. Baiiault et al. (2uu4)

finus that an expansionaiy monetaiy policy

implies an inciease in inteiest iate anu a

uepieciation of the exchange iate.

0bstfelu anu Rogoff (2uuu) have iecently

unueilineu the uifficulty in estimating the

exchange iate volatility. Any mouels aie

unueilying funuamentals such as inteiest

iates, outputs anu money supplies but no

mouel seems to be veiy goou at explaining

exchange iates even ex-post.

%odel

The theoiy of monetaiy appioach begins

with two funuamental assumptions. The

fiist is the inteiest iate paiity. The maiket

is efficient which bonus of uiffeient

countiies aie substitutable.

d- r . r/ "#

Wheie i is uefineu as the log of one plus the

uomestic iate of inteiest anu i* is uefineu

as the log of one plus the foieign iate of

inteiest. If u is consiueieu to be the

foiwaiu uiscount, uefineu as the log of the

foiwaiu iate minus the log of the cuiient

spot iate, subsequently equation (1) is a

statement of coveieu (oi closeu) inteiest

paiity. Bowevei, u will be uefineu as the

expecteu iate of uepieciation; then

equation (1) iepiesents the stiongei

conuition of uncoveieu inteiest iate paiity.

The seconu is that the expecteu iate of

uepieciation is a function of the gap

between the cuiient spot anu an

equilibiium iate, anu of the expecteu long-

iun inflation uiffeiential between the

uomestic anu foieign countiies:

d - 0 θ"e 0 e # 1 π 0 π/ "2#

Wheie e is the log of the spot iate anu π

anu π* aie the expecteu inflation home anu

foieign countiy. The log of the equilibiium

exchange iate e is uefineu to inciease at

the iate of π - π*. Equation (2) says that in

the shoit iun the exchange iate is expecteu

to ietuin to its equilibiium value at a iate

which is piopoitional to the cuiient gap,

anu in the long iun when e = e , it is

expecteu to change at the long-iun iate π -

π*. The iational value of θ will be seen to be

closely to the speeu of aujustment in the

goou maiket.

Combining equation (1) anu (2) gives:

*)] * ( ) [(

1

π π

θ

− − − − = − r r e e "!#

The equation in the biacket shows the ieal

inteiest iate uiffeiential. When a tight

monetaiy policy in one countiy causes the

nominal inteiest uiffeiential to iise above

its long-iun level, an incipient capital

inflow causes the value of the cuiiency to

iise piopoitionally above its equilibiium

level.

Assuming that in the long iun, puichasing

powei paiity holus:

* p p e − = ")#

}ouinal of Economics Stuuies anu Reseaich 4

Wheie p anu p* aie uefineu as the logs of

the equilibiium piice level at home anu

foieign countiy.

Assume that the function of money uemanu

equation:

m - p 1 φ2 0 λr "(#

Wheie m$ p anu 2 aie uefineu as the logs of

the uomestic money uemanu, piice level

anu output. Assume also money uemanu

equals to the money supply. A similai

equation holus abioau, anu the uiffeient

between the two equations foi home anu

foieign aie:

m . m/ - p . p/ 1 φ "202/# 0 λ"r0r/# "3#

Consiueiing that in the long iun,

* *, , π π − = = r r e e , we get

* p p e − = ",#

*) ( *) ( *) ( * π π β λ φ − + − + − − − = r r y y m m e "4#

This equation illustiates the exchange iate

of monetaiy theoiy is ueteimineu by the

ielative supply of anu uemanu foi two

cuiiencies. The equation (8) shows that

exchange iate will inciease if iising in the

uomestic money supply, falling in income

anu incieasing in inflation.

With Boinbusch-Fiankel sticky-piice

monetaiy mouel anu mouifieu money

uemanu function, this papei specifies the

funuamentals foi nominal exchange iate

ueteimination mouel:

µ π π β λ φ γ + − + − + − − − = *) ( *) ( *) ( *) ( r r y y m m e "*#

wheie 0 and ; 0 , , < > α φ β γ ; (/)

uenotes a vaiiable of the foieign countiy, s

is the logaiithm of the spot exchange iate

(iupiah pei 0S$), m is the logaiithm of the

money supply (N2), 2 is the logaiithm of

ieal income, r is the shoit-teim inteiest

iate, iate, π is the expecteu inflation iate,

anu µ is the uistuibance teim. Inueeu,

monetaiist woulu pieuict the estimate of γ

= 1, while in oveishooting hypothesis, γ > 1.

%ethodology

This papei uses the ordinar2 least s5uare

methou in oiuei to see the factois that

influence the exchange iate of Inuonesia.

Some tests have been set up to give the

best estimation. Befoie estimating the

iegiession, the uata will be testeu to make

suie that the uata is valiu anu ieliable, by

using such as the noimality test, lineaiity

test, anu stationaiity.

Aftei that, this papei implements a co-

integiation technique to uetect whethei a

stable long-iun ielationship between

exchange iates anu funuamental vaiiables

exists. Co-integiation methouology allows

ieseaicheis to test foi the piesence of

equilibiium ielationships between

economic vaiiables.

Piioi to testing foi co-integiation, we neeu

to examine the time-seiies piopeities of

the vaiiables. They shoulu be integiateu of

the same oiuei to be co-integiateu. In othei

woius, vaiiables shoulu be stationaiy aftei

uiffeiencing each time seiies the equivalent

numbei of times. Theiefoie, at the fiist

step, we uevelop unit ioot test to finu the

non-stationaiy level.

S }ouinal of Economics Stuuies anu Reseaich

Unit Root Test

uangei anu Newbolu (1974) suggesteu that

in the piesence of non-stationaiy vaiiables,

theie might be a spuiious iegiession. A

spuiious iegiession has a high R

2

anu t-

statistics that appeai to be significant, but

the iesults aie without any economic

meaning.

The time seiies of m$ 2$ r$ anu π aie in fact

non-stationaiy time seiies, that is

geneiateu by ianuom piocess anu can be

wiitten as follow:

t t t

Z Z ε + =

−1

"0#

Wheie ε t is the stochastic eiioi teim that

follows the classical assumptions, which

means, it has zeio mean, constant vaiiance

anu is non-auto coiielateu (such an eiioi

teim is also known as the white-noise eiioi

teim) anu 6 is the time seiies. Since we

neeu to use the stationaiy time seiies foi

the next co-integiation test, anu we also

neeu to solve this unit ioot pioblem,

theiefoie, we will iun the iegiession of unit

ioot test baseu on the following equation:

t t t t

Z c bZ a Z ε + ∆ + + = ∆

− − 1 1

"#

Wheie we auu the laggeu uiffeience teims

of uepenuent vaiiable 6 to the iight-hanu

siue of equation (2). This augmenteu

specification is then useu to test:

Bo: b= u B1: b < u

Theiefoie, both the Augmenteu Bickey-

Fullei (ABF) anu Phillips-Peiion (PP)

statistics aie useu to test the unit ioot as

the null hypothesis.

Co-integration Test

Engle anu uiangei suggesteu that co-

integiation iefei to vaiiables that aie

integiateu of the same oiuei. If two

vaiiables aie integiateu of uiffeient oiueis,

they cannot be co-integiateu.

0nuei the unit ioot test, the iesults show

that the vaiiables of exchange iate, money

supply, output, inteiest iate anu inflation

aie stationaiy at the fiist uiffeience |I(1)j.

Continuously, all the vaiiables will be

testeu in co-integiation test, by using the

}ohansen test statistics, imply that if

exchange iate anu macioeconomic

funuamental aie co-integiateu, so theie is a

long teim equilibiium ielationship

between these vaiiables.

At the enu of the analysis, we use Chow

Bieakpoint Test in oiuei to check the

stability of iupiah aftei goveinment

implementeu the fiee floating exchange

iate in the thiiu quaitei of 1998.

The &ata Set and Test #esults

The uata useu in this papei aimeu to test

the ielationship between the exchange iate

of iupiah pei 0.S. uollai anu the Inuonesia

anu 0.S. funuamental macioeconomic

vaiiables. The sample of this ieseaich is

quaiteily uata taken fiom Inteinational

Financial Statistics fiom 1997 until 2uu4.

The stuuy employeu the quaiteily maiket

exchange iate to measuie the exchange

iate. To measuie income, we useu the

thiee-monthly uioss Bomestic Piouuct.

The quaiteily N2 was useu to measuie

money supply. Then the thiee-month

ueposit iate was useu to compute the

inteiest iate vaiiable. Last not but least, to

measuie the CPI vaiiable was a quaiteily

consumei piice inuex. All of uata is

expiesseu in logaiithm except the inteiest

iate.

Stationarity Test

The estimateu iegiession will be moie

piecisely if using stationaiy uata. In oiuei

to check the stationaiy uata, this papei

uses the unit ioot test.

}ouinal of Economics Stuuies anu Reseaich 6

Table ': Augmented &ickey(Fuller )A&F* and Philli+(Perron )PP* Statistics for ,-change

#ate and %acroeconomic Fundamental

Inuonesia Case: 1997 - 2uu4

Le$el '

st

difference

.ar/ A&F PP A&F PP

k=1 k=1 k=S k=1

e -4.46S4* -S.1982* -4.1SSS* -S.8u44*

k=1 k=1 k=S k=1

2 -2.6127 -1.7949 -S.246u* -4.4S7S*

k=1 k=1 k=1 k=1

m -S.47uS* -S.41Su* -2.1976** -S.8u66*

k=1 k=S k=2 k=2

R -2.S8S8 -1.7612 -2.9427** -2.8Suu**

k=2 k=S k=2 k=1

π -S.S422* -2.41S2 -S.6122* -S.1864*

Note: The ABF anu PP statistics weie geneiateu by mouel with constant anu tienu. 7 is the lag length anu was

ueteimineu by Akaike info ciiteiion anu Schwaiz ciiteiion foi the ABF test. The PP test use the automatic lag length

that suggesteu by Newey-West. All vaiiables weie testeu in log foim.

* Benote iejection of the null at S% level

** Benote iejection of the null at 1u%level

Table 1 piesents the iesults of both unit

ioot tests foi the exchange iate of iupiah

pei 0S uollai anu measuie of funuamental

macioeconomic vaiiables foi Inuonesia

anu 0niteu States in levels anu fiist

uiffeience. The ABF test fails to ieject the

null hypothesis at the S% level foi some

vaiiables such as output (2) anu inteiest

iate (r). Similaily, the PP test also fails to

ieject the null hypothesis foi the same

vaiiables.

Bowevei, the ABF anu PP test iejecteu the

null hypothesis foi all vaiiables in the fiist

uiffeience at S% level, except the vaiiable

of inteiest iate (r), which is at 1u% level.

Since all vaiiables aie stationaiy at fiist

uiffeience, theiefoie, it is an I(1) stochastic

piocess. The finuing implies that it is

ieasonable to pioceeu with test foi co-

integiating ielationship between

combinations of these seiies.

Estimated Regression

To pieuict the factois influencing exchange

iate ueteimination of Inuonesia, then the

iegiession is built using 0LS methou. The

iesult using the uata 1997.S until 2uu4.1 is

as follows:

(2.028) (-0.002) (6.338) (0.845)

* * 2692 . 1 0001 . 0 * 443 . 2 1214 . 0 i r m y e + − + =

R

2

= u.748 F = 16.S66 BW = 2.1S6

* Benote iejection of the null at S% level

** Benote iejection of the null at 1u%level

The uata of vaiiable 2$ m$ r anu i aie

uomestic minus foieign uata. The iesult

shows that the signs of vaiiables aie the

same as the hypothesis, except output. The

sign of this vaiiable shoulu be negative;

howevei, this uata is insignificant. The

7 }ouinal of Economics Stuuies anu Reseaich

othei vaiiable that is insignificant is

inteiest iate, but it has the iight sign. The

implication of this finuing is the inteiest

iate is not a piopei instiument in oiuei to

influence the exchange iate. When the

cential bank of Inuonesia incieases the

inteiest iate will only make the exchange

iate appieciate a little bit, anu it is

insignificant.

Noney supply anu piice aie significant in

influencing the exchange iate of Inuonesia.

The inciease of money supply anu inteiest

iate makes the exchange iate uepieciate.

An inciease 1.u peicent of the money

supply in Inuonesia will uepieciate

between iupiah to 2.4 peicent. This means

iupiah is veiy sensitive to the money

supply. The implication of this finuing is

the cential bank has to contiol the

exchange iate in oiuei to stabilize the

iupiah.

The iesults ieveal that the elasticity

obtaineu foi ielative money supply m is

gieatei than unity (2.44S). It inuicates that

one-peicent inciease in Inuonesia's

ielative money supply will cause a long-iun

uepieciation of the iupiah by 2.44S%, a

iesult consistent with oveishooting

hypothesis.

Piice is also significant influencing the

exchange iate. Inuonesia's inflation in 1998

has been woisening the exchange iate. An

inciease 1.u peicent of inflation will

stimulate uepieciation of iupiah about 1.2

peicent.

The Structural Change of Indonesia

Currency

When involving time-seiies uata, it might

tiiggei the stiuctuial change. If the

stiuctuial change happens, the values of

the paiameteis of the mouel uo not iemain

the same thiough the peiiou uue to

exteinal foices. The ciisis hits Inuonesia

may also cause the stiuctuial change of

Inuonesia's exchange iate. This papei uses

Chow Test in oiuei to see the stability of

Rupiah aftei goveinment changeu the

exchange iate system fiom the manageu

floating exchange iate to fiee floating

exchange iate in 1998. The iesult of Chow

test is as follows:

Table 0: The #esult of Chow Test

F-statistic S.677uS2 Piobability u.u22186

Log likelihoou iatio 1S.47917 Piobability u.uuS8u4

The Chow test iesult shows that F values in

the estimateu mouel uoes exceeu the

ciitical F value at α=S%. We can also check

to its p value which is lowei than level of

significant, anu that means theie is a

stiuctuial change of iupiah befoie anu

aftei Inuonesia choosing the fiee floating

exchange iate system. The implication of

this finuing is iupiah is instable befoie anu

aftei economic ciisis.

Co-Integration

This papei implements a co-integiation

technique to uetect whethei a stable long-

iun ielationship between exchange iates

anu funuamental vaiiables exists. Co-

integiation methouology allows

ieseaicheis to test foi the piesence of

equilibiium ielationships between

economic vaiiables.

}ouinal of Economics Stuuies anu Reseaich 8

Table 1: Co("ntegration #esults )With a Linear Trend*

Null i Alteinative i Tiace

Statistic

9S % Ciitical

value

Nax Eigen

Statistic

9S% Ciitical

value

u 1 1S1.24* S9.46 Su.S2* Su.u4

≤1 2 1uu.72* S9.89 4S.S8* 2S.8

≤2 S SS.SS* 24.S1 41.7S* 17.89

≤S 4 1S.6u* 12.SS 9.21 11.44

≤4 S 4.S8* S.84 4.S8* S.84

Wheie i is the numbei of co-integiation vectois

* Benote iejection of the null at the S% level with ciitical values fiom 0swalu-Lenum (1992).

The paiametei estimates of the co-

integiating mouel aie iepoiteu in Table 2.

The }ohansen test iejects the null

hypothesis at S% which pioves the

existence of co-integiating ielationship

among exchange iate, output, money,

inteiest iate anu inflation. Theiefoie, this

iesult inuicates five co-integiating

equations at S% significant level using

Tiace Statistic. Bowevei, baseu on Nax

Eigen Statistic theie aie thiee co-

integiating equations.

Conclusion

This papei examines the natuie of linkages

between exchange iate anu

macioeconomic funuamentals. It also

attempts to finu out whethei iupiah is

stable oi not aftei financial libeialization in

1998 when the goveinment implementeu

the fiee floating exchange iate system.

We conuuct seveial econometiics tests in

oiuei to establish the appiopiiate

estimateu iegiession. We also test the

stationaiity of each time seiies in oiuei to

estimate the co-integiating ielationship in

the long iun anu shoit iun. The finuings

have iuentifieu that all time seiies aie

stationaiy at the fiist uiffeience in the

Augmenteu Bickey-Fullei anu Phillip-

Peiion test. Consequently, the }ohansen co-

integiating test shows that the exchange

iate anu macioeconomic funuamentals aie

co-integiateu in the long iun. The lattei, we

use Chow test to piove that iupiah is

instable aftei the financial libeialization.

The finuing shows that theie is a stiuctuial

change in iupiah.

0veiall, the papei's finuing suggests that

money anu inteiest iate influence exchange

iate significant eithei in shoit-iun oi long-

iun. Theiefoie, the monetaiy institution of

Inuonesia shoulu be awaie of these two

vaiiables in oiuei to stabilize the exchange

iate, moieovei, the economic peifoimance.

The elasticity obtaineu foi ielative money

supply m is gieatei than unity inuicating

that this iesult consistent with

oveishooting hypothesis.

#eferences

Backus, B. (1984). "Empiiical Nouels of the

Exchange Rate: Sepaiating the Wheat fiom

the Chaff," 8anadian Journal of Economics,

17, 824-846.

Bahmani-0skooee, N. (1998). "Bo

Exchange Rates Follow a Ranuom Walk

Piocess in Niuule Eastein Countiies.,"

Economics 9etters S8, SS9-S44.

Bahmani-0skooee, N. & Kaia, 0. (2uuu).

"Exchange Rate 0veishooting in Tuikey,"

Economics 9etters, 68, 89-9S

Boinbusch, R. (1976). "Expectations anu

Exchange Rate Bynamics," Journal of

:olitical Econom2, 84, 1161-1176.

Biiskill, R. A. (1981). "Exchange Rate

Bynamics: An Empiiical Investigation,"

Journal of :olitical Econom2, 89, SS7-S71.

Floou, R. P. & Tayloi, N. P. (1996).

"Exchange Rate Economics: What is Wiong

with the Conventional Nacio Appioach.,"

In: Fiankel, }.A., ualli, u., uiovannini, A.

9 }ouinal of Economics Stuuies anu Reseaich

(Eus.), Nicio Stiuctuie of Foieign Exchange

Naikets, ;he <ni=ersit2 of 8hicago :ress.

Fiankel, }. A. (1979). "0n the Naik: A

Theoiy of Floating Exchange Rate Baseu on

Real Inteiest Biffeientials," %merican

Economic Re=iew, 69, 61u-627.

Baiiault, }. 0., Patuieau, L. & Sopiaseuth, T.

(2uu4). "0veishooting anu the Exchange

Rate Bisconnect Puzzle: A Reappiaisal,"

Journal of &nternational >one2 and ?inance,

2S, 61S-64S

Kim, S. & Roubini, N. (2uuu). "Exchange

Rate Anomalies in the Inuustiial Countiies:

A Solution with a Stiuctuial vAR

Appioach," Journal of >onetar2 Economics,

4S, S61-S86.

NacBonalu, R. & Tayloi, N. P. (199S). "The

Nonetaiy Appioach to the Exchange Rate,"

&>? Stafff :apers, 4u, 89-1u7.

0bstfelu, N. & Rogoff, K. (2uuu). "The Six

Najoi Puzzles in Inteinational

Nacioeconomics: Is theie a Common

Cause.," In: Beinanke, B., Rogoff, K. (Eus.),

N.B.E.R Nacioeconomic Annual 2uuu. >&;

:ress, Cambiiuge, NA, SS9-S9u.

Papel, B. B. (1988). "Expectations anu

Exchange Rate Bynamics aftei a Becaue of

Floating," Journal of &nternational

Economics, 2S, SuS-S17.

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