The International Trade Journal, 29:103–114, 2015

Copyright © Taylor & Francis Group, LLC

ISSN: 0885-3908 print/1521-0545 online
DOI: 10.1080/08853908.2015.1005779

The J-Curve: Evidence from Industry-Level Data

Between the U.S. and Indonesia

MOHSEN BAHMANI-OSKOOEE
Department of Economics, The University of Wisconsin–Milwaukee,
Milwaukee, Wisconsin, USA

HANAFIAH HARVEY
Department of Economics, Pennsylvania State University Mont Alto,
Mont Alto, Pennsylvania, USA

Empirical studies on the impact of currency devaluation or depre-

ciation on the trade balance still continue to occupy the literature.
These studies have evolved from using aggregate to disaggregated
data. The findings, however, have been mixed. Previous research
using aggregate trade flows of Indonesia with the rest of the
world or bilateral data between Indonesia and the U.S. as one of
its major trading partners found no significant relation between
rupiah-dollar rate and Indonesia’s bilateral trade balances. In this
article, we disaggregate the trade flows between Indonesia and the
U.S. by commodity and show that the trade balances of at least nine
out of 23 industries react to exchange rate changes favorably in the
long run.

KEYWORDS Indonesia, U.S., J-curve, industry data

I. INTRODUCTION

The response of the trade balance to exchange rate changes still continues
to attract interest from many. Old studies claimed that if the Marshall-Lerner
condition is satisfied, currency devaluation under a fixed exchange rate sys-
tem or currency depreciation under a flexible exchange rate system will

Address correspondence to Mohsen Bahmani-Oskooee, Department of Economics, The

University of Wisconsin-Milwaukee, P.O. Box 413, Bolton Hall, Room 802, 3210 N. Maryland
Avenue, Milwaukee, WI 53201, USA. E-mail: bahmani@uwm.edu

103
104 M. Bahmani-Oskooee and H. Harvey

improve the trade balance in the long run.1 However, in the early 1970s,
Magee (1973) argued that, due to adjustment lags, the trade balance could
deteriorate after devaluation and only improve after the lags are realized,
hence the J-Curve pattern. Bahmani-Oskooee (1985) provided an empirical
counterpart to Magee (1973) by introducing a reduced form trade balance
model that was estimated using regression analysis. Backus et al. (1994)
introduced an alternative approach that was based on cross-correlation
between current exchange rate and past as well as future values of the trade
balance that came under the heading of the S-Curve.2
Since this article is concerned with the response of Indonesia’s trade
balance to currency depreciation, a short account of the literature is in order.
Indonesia is one of the member countries in the Association of South East
Asian Nations (ASEAN) and it is also one of the largest economies in ASEAN
with a nominal GDP of $846 billion in 2011. The Bank of Indonesia (central
bank) allows the rupiah to float freely. However, it is committed to intervene
should the rupiah become more volatile.3
Studies that estimated price elasticities to infer the Marshall-Lerner con-
dition include Houthakker and Magee (1969), Khan (1974), Warner and
Kreinin (1983), Gylfason and Risager (1984), Rose (1991), Bahmani-Oskooee
(1986), Bahmani-Oskooee (1998), Bahmani-Oskooee and Niroomand (1998),
Bahmani-Oskooee and Kara (2005), and Sweidan (2013). Unfortunately,
none of these studies included Indonesia in their sample. Bahmani-Oskooee
and Alse (1994), who relied upon cointegration between the trade balance
and the real exchange rate as an alternative approach to testing the Marshall-
Lerner condition, did include Indonesia among 41 countries in their sample.
However, since Indonesia’s trade balance and its real effective exchange
rate were integrated of different order, cointegration technique could not be
applied to the case of Indonesia. Lal and Lowinger (2002) carried out another
study that estimated a trade balance model for seven Asian countries includ-
ing Indonesia. Using Johansen’s cointegration technique, they showed that,
although there were two cointegrating vectors between Indonesian trade
balance with the rest of the world and its determinants, the real effective
exchange rate was not significant in the long run. In the short run, however,
the J-Curve was detected.4

1
The Marshall-Lerner condition basically claims for a small country that, as long as the sum of
import and export demand elasticities adds up to unity, devaluation will improve the trade balance.
Bahmani-Oskooee et al. (2013) provide the most comprehensive review of the literature.
2
For a review of the literature on J- and S-curves, see Bahmani-Oskooee and Hegerty (2010).
3
Bank of Indonesia.
4
Another body of the literature aims at estimating import and export demand functions separately.
Examples include King (1993), Alse and Bahmani-Oskooee (1995), Charos et al. (1996), Truett and Truett
(2000), Du and Zhu (2001), Love and Chandra (2005), Agbola and Damoense (2005), and Narayan and
Narayan (2005).
 The J-Curve 105

Suspecting that Lal and Lowinger’s (2002) findings could suffer

from aggregation bias, Bahmani-Oskooee and Harvey (2009) disaggregate
Indonesian trade flows by trading partners and assess Indonesia’s trade bal-
ance with each of its 13 trading partners separately.5 They employ a bounds
testing approach to cointegration and error correction modeling and quar-
terly data over the period 1974–2008. They found that, in the majority of the
cases, real depreciation of the rupiah has a short-run effect on Indonesian
bilateral trade balances, while only in the case of Canada, Japan, Malaysia
and the UK did it have long-run effects. There was no evidence of the
J-curve and no evidence of any long-run effect on the bilateral trade balance
between Indonesia and the U.S.
We suspect that the findings by Bahmani-Oskooee and Harvey (2009)
associated with the bilateral trade balance between Indonesia and the U.S.
could suffer from another aggregation bias. Since different commodity trade
flows react differently to changes in the exchange rate, a significant relation
between the exchange rate and trade flows of some commodities could
be offset by insignificant ones yielding insignificant results. To this end, in
this article, we disaggregate trade flows between Indonesia and the U.S. by
commodity and investigate the response of the trade balance of 23 industries
to the real rupiah-dollar depreciation. The 23 industries are only industries
for which continuous data were available and altogether account for almost
50% of the trade between the two countries. The plan of the article is as
follows: Section II introduces the model and methodology. Empirical results
supporting our conjecture are reported in Section III. Section IV provides a
summary and conclusion followed by variable definitions and data sources
in an Appendix.

II. THE MODEL AND THE METHOD

Assessing the long-run relation between the trade balance and the real
exchange rate at the commodity level has now become a tradition. In this
article, we follow Bahmani-Oskooee and Xu (2012) and adopt the following
specification:

LnTBi, t = α + b LnYIndo, t + c LnYUS, t + d Ln REXt + εt (1)

Since data are reported by the U.S., we define the variables and coefficient
signs from the U.S. perspective. As such, in Equation (1), TBi measures the
trade balance of industry i and it is defined as the ratio of U.S. exports of
commodity i to Indonesia over its import of commodity i from Indonesia.

5
The trading partners were: Australia, Canada, China, Hong Kong, Japan, Korea, Malaysia, New
Zealand, Philippines, Saudi Arabia, Singapore, Thailand, the U.S., and the UK.
106 M. Bahmani-Oskooee and H. Harvey

Clearly, the main determinants of industry i’s trade balance are identified to
be level of economic activity in Indonesia (YIndo ), level of economic activity
in the U.S. (YUS ), and the real bilateral exchange rate (REX). Since an increase
in the level of economic activity in Indonesia is expected to boost the U.S.
exports to that country, we expect an estimate of b to be positive. However,
since an increase in the U.S. economic activity is expected to boost U.S.
imports from Indonesia, we expect an estimate of c to be negative. From
the Appendix, we gather that the definition of the REX follows the definition
of the nominal exchange rate, which is defined to be number of dollars per
rupiah. Therefore, if a dollar depreciation or an increase in REX is to improve
the U.S. trade balance of industry i, we expect an estimate of d to be positive.
Since the J-Curve effect is a short-run concept, we need to incorporate
a short-run dynamic into Rquation (1). Bahmani-Oskooee and Xu (2012) fol-
low Pesaran et al.’s (2001) bound testing approach and specify Equation (1)
in an error-correction modeling format as in Equation (2).


n1 
n2 
n3
LnTBi, t = α + bk  Ln TBi, t−k + ck  Ln YIndo, t−k + dk  Ln YUS, t−k
k=1 k=0 k=0


n4
+ ek  Ln REXt−k + λ1 Ln TBi, t−1 + λ2 Ln YIndo, t−1 + λ3 Ln YUS, t−1
i=0

+ λ4 Ln REXt−1 + μ
(2)

Since our emphasis is on the effects of REX, the short-run effects are judged
by the estimates of ek ’s and the long-run effects by the estimate of λ4 normal-
ized on λ1 .6 However, for the long-run effects to be valid and not spurious,
Pesaran et al. (2001) propose applying an F-test to determine the joint sig-
nificance of lagged level variables in (2) as a sign of cointegration among
all four variables. The F-test that they propose has new critical values that
they tabulate for large samples and Narayan (2005) does it for small sam-
ples. An upper bound critical value is provided when all variables in a given
model are I(1) and a lower bound critical value is provided when they are
all I(0). They then demonstrate that the upper bound critical value could be
used even if some variables are I(1) and some are I(0). Since most macro
variables are either I(1) or I(0), under this approach there is really no need
to test for unit root and this is one of the main advantages of this approach.7

6
For details of the normalization procedure, see Bahmani-Oskooee and Tanku (2008).
7
For some other applications of this approach, see Bahmani-Oskooee et al. (2005), Bahmani-
Oskooee and Hegerty (2007), Halicioglu (2007), Narayan et al. (2007), Tang (2007), Mohammadi et al.
(2008), Wong and Tang (2008), De Vita and Kyaw (2008), Payne (2008), Bahmani-Oskooee and Gelan
(2009), Shahbaz et al. (2012), and Chen and Chen (2012).
 The J-Curve 107

III. THE RESULTS

As the Appendix shows, annual data over the period 1973-2011 are used to
estimate specification (2) for each of the 23 industries that trades between the
U.S. and Indonesia. Following the literature, we impose a maximum of four
lags on each of the first difference variables and use Akaike’s Information
Criteria (AIC) to choose the optimum lags. The results are reported in
Tables 1 and 2.
For brevity of presentation, we only report the short-run coefficient
estimates of the real bilateral exchange rate in Table 1. However, long-run
coefficient estimates are reported for all variables. From the short-run esti-
mates, we gather that there are 18 industries in which there is at least one
significant short-run coefficient (at the 10% level of significance), implying
that most industries’ trade balances are affected by exchange rate changes
in the short run. If we follow the traditional definition of the J-Curve (i.e.,
negative short-run coefficients at the early lags followed by positive ones at
higher lags), we find no J-Curve effects. However, if we follow an alterna-
tive definition by Rose and Yellen (1989, 67)—i.e., negative short-run effects
followed by positive long-run effects—then clearly we find support for the
phenomenon in nine industries. In these industries, which are coded as 031,
541, 653, 666, 812, 821, 894, 899, and 931, the real exchange rate carries posi-
tive and significant coefficient (again, at the 10% significance level). Whereas
real depreciation of the dollar does not seem to have long-run effects on the
aggregate bilateral trade balance between the U.S. and Indonesia, disaggre-
gation by commodity proves to be useful in identifying nine commodities
that will benefit from real depreciation in the long run. Note that all of these
industries happen to be small and the two largest industries—i.e., industries
coded 231 (crude rubber) and 841 (clothing except fur clothing)—do not
seem to react to exchange rate changes in the long run.
As for the other long-run coefficient estimates, the results reveal that the
level of economic activity in Indonesia has significant impact on the trade
balance of six industries. While in three industries coded 031, 292, 332 the
effect is expectedly positive, in three industries coded 653, 656, and 666 it
is negative. The negative coefficient obtained for YIND implies that as the
Indonesian economy grows, it produces more of import substitute goods in
these industries and therefore imports less of these commodities from the
U.S. The U.S. economic activity (YUS ) does not seem to have much of an
impact since it only carries significant coefficient in two industries (541 and
656).8

8
Note that we included a dummy variable in our specification to evaluate the impact of the Asian
financial crisis in 1997. The dummy carried a significant coefficient in eight industries coded 031, 231, 332,
653, 666, 729, 821, and 894, suggesting that the Asian financial crisis had an impact on U.S.-Indonesia’s
trade balances for these industries.
 TABLE 1 Short-Run and Long-Run Coefficient Estimates
Short-Run Estimates Long Run-Estimates
SITC Industry T. Share  In REXt  In REXt-1  In REXt-2  In REXt-3 Constant In YINDO Ln YUS Ln REX
Aggregate −0.04 (0.14) 0.74 (2.63) 0.83 (2.72) −0.43 (1.45) 20.23 (0.93) 1.98 (1.74) −5.97 (1.41) −0.04 (0.14)
031 Fish, fresh & simply preserved 3.26% 2.77 (3.69) −0.30 (0.34) 0.94 (1.07) −0.07 (1.25) 47.74 (1.51) 3.14 (2.06) −9.45 (1.58) 1.37 (1.81)
121 Tobacco, unmanufactured 0.26% 2.21 (3.77) 42.89 (1.29) 1.88 (1.27) −6.29 (1.10) 1.23 (1.35)
231 Crude rubber incl. synthetic & recl. 11.46% 0.38 (1.68) −7.24 (0.54) −0.48 (0.44) 1.67 (0.61) 0.68 (1.27)
292 Crude vegetable materials, n.e.s. 0.05% −0.06 (0.20 −0.43 (1.11) −0.81 (2.35) −0.82 (2.49) 11.21 (0.80) 1.86 (3.23) −3.07 (1.42) 0.52 (0.80)
332 Petroleum products 0.74% 2.59 (3.29) 0.73 (0.86) 2.49 (2.79) −8.12 (0.45) 1.37 (1.70) −0.46 (0.14) 0.92 (1.61)
422 Other fixed vegetable oils 1.39% −1.23 (1.30) −85.98 (1.18) −7.29 (1.47) 21.40 (1.37) 1.09 (0.66)
541 Medicinal & pharmaceutical 0.23% −0.09 (0.15) −1.88 (2.36) 0.07 (0.09) −2.03 (2.73) −22.29 (1.42) −0.99 (0.90) 6.34 (1.69) 2.03 (2.24)
products
551 Essential oils, perfume and flavor 0.28% 1.55 (3.66) 1.08 (2.07) −36.44 (1.50) 0.34 (0.26) 3.53 (0.79) −0.93 (1.38)
632 Wood manufactures, n.e.s. 0.39% −1.98 (1.49) 168.35 (1.23) −6.08 (1.00) 29.56 (1.25) 1.84 (0.81)
653 Text fabrics woven 0.08% 3.39 (3.09) −0.12 (0.09) −2.07 (1.55) −1.23 (1.22) −7.21 (0.11) −5.70 (1.77) 14.08 (1.12) 4.91 (2.71)
656 Made up articles, wholly or chiefly 0.18% 1.54 (2.12) −19.49 (0.87) −4.53 (3.66) 8.28 (2.06) −0.18 (0.23)
657 Floor coverings, tapestries, etc. 0.07% 2.55 (1.67) 4.16 (2.42) 1.01 (0.51) −4.10 (2.41) −11.24 (0.03) −14.96 (0.49) 7.33 (0.09) −16.51 (0.88)
666 Pottery 0.22% 1.98 (2.03) 43.29 (1.38) −4.23 (2.73) 6.13 (1.04) 5.12 (5.31)

108
729 Other electrical machinery and 1.50% −0.36 (0.82) −1.06 (2.08) −0.86 (1.83) −0.79 (1.81) −12.21 (0.72) −0.26 (0.38) 1.98 (0.64) 0.23 (0.33)
apparatus
812 Sanitary, plumbing, heating & light 0.10% 0.42 (0.37) 95.81 (2.33) 0.38 (0.18) −6.32 (0.83) 4.98 (3.79)
821 Furniture 2.32% 1.40 (2.72) 70.45 (3.55) 0.15 (0.12) −4.13 (1.13) 4.47 (6.38)
841 Clothing except fur clothing 19.97% 0.38 (0.56) −23.77 (0.39) −1.29 (0.40) −0.51 (0.04) −4.08 (1.31)
892 Printed matter 0.08% 0.83 (0.89) 132.67 (1.31) 6.72 (1.24) −26.63 (1.32) 1.66 (0.72)
894 Perambulatorsm toys, games and 0.88% 1.91 (2.23) 0.35 (0.32) 0.36 (0.39) −1.44 (1.64) 68.45 (6.99) −1.39 (0.42) 1.26 (0.09) 7.30 (3.23)
sport
896 Works of art, collectors pieces 0.03% 1.68 (1.21) 7.47 (4.16) 5.58 (3.23) 2.30 (1.57) 80.16 (1.37) 1.26 (0.65) −15.92 (1.55) −5.33 (2.09)
897 Jewellery and gold/silver smiths 0.51% −0.73 (0.78) 2.28 (1.97) 1.42 (1.01) −1.47 (1.12) −799.66 (0.55) −21.91 (0.54) 122.49 (0.55) 1.71 (0.14)
watches
899 Manufactured articles, n.e.s. 0.96% 1.83 (2.93) 56.19 (2.01) 0.79 (0.52) −5.10 (0.97) 2.64 (3.05)
931 Special transactions not classd. 4.77% 1.06 (1.78) 97.35 (1.46) −3.88 (1.27) −13.88 (1.27) 5.54 (2.32)
according to kind
Notes:
1. Number inside the parenthesis next to each coefficient is absolute value of the t-ratio.
2. T. Share (Trade share) of each industry is calculated as sum of exports and imports of that industry as percent of sum of total U.S. exports and imports to Indonesia, which
includes industries for which no data were available. These shares are only for 2011.
 TABLE 2 Diagnostic Statistics
SITC Industry F at opt. lags ECMt-1 LM RESET CUSUM CUSUMSQ Adj R2
Aggregate 0.61 −0.39 (2.62) 0.12 1.46 S S 0.59
031 Fish, fresh & simply preserved 1.34 −0.89 (3.39) 0.02 2.05 S US 0.41
121 Tobacco, unmanufactured 1.33 −0.51 (2.40) 0.56 0.04 S S 0.45
231 Crude rubber incl. synthetic & recl. 1.77 −0.55 (2.99) 0.98 2.26 S S 0.07
292 Crude vegetable materials, n.e.s. 6.92 −0.58 (4.25) 2.59 1.11 S S −0.01
332 Petroleum products 1.24 −1.48 (3.98) 0.01 0.17 S S 0.55
422 Other fixed vegetable oils 2.85 −0.46 (2.09) 2.04 0.25 S S 0.46
541 Medicinal & pharmaceutical products 0.76 −0.76 (2.82) 0.83 2.19 S S 0.37
551 Essential oils, perfume and flavor 3.19 −0.45 (2.44) 0.04 0.83 S S 0.58
632 Wood manufactures, n.e.s. 1.67 0.39 (2.01) 5.29 0.33 S S 0.33
653 Text fabrics woven 1.29 −0.57 (3.47) 2.95 16.02 S S 0.32
656 Made up articles, wholly or chiefly 6.02 −1.18 (4.97) 0.29 0.15 S S 0.66
657 Floor coverings, tapestries, etc. 3.88 0.15 (0.71) 0.37 0.99 S S 0.62
666 Pottery 3.47 −0.73 (4.95) 0.62 0.05 S S 0.16
729 Other electrical machinery and apparatus 1.23 (4.23) 0.01 0.26 S S

109
−0.67 −0.21
812 Sanitary, plumbing, heating & light 1.98 −0.62 (4.00) 5.30 1.38 S US 0.15
821 Furniture 1.29 −0.51 (3.37) 3.45 0.58 S S 0.32
841 Clothing except fur clothing 9.89 −0.35 (2.75) 9.64 2.97 S S 0.19
892 Printed matter 2.06 −0.34 (2.28) 3.49 7.05 S US 0.05
894 Perambulators, toys, games and sports 1.37 −0.38 (2.99) 0.04 0.13 S S 0.37
896 Works of art, collectors pieces 9.44 −0.71 (3.03) 10.79 0.27 S S 0.31
897 Jewellery and gold/silver smiths watches 1.29 −0.09 (0.62) 1.13 5.87 S US 0.26
899 Manufactured articles, n.e.s. 3.48 −0.69 (4.34) 3.65 0.55 S US −0.01
931 Special transactions not classd. according to kind 3.67 −0.34 (2.26) 5.24 0.88 S S 0.10
Notes:
1. LM: Lagrange multiplier test of residual serial correlation. It is distributed as χ 2 (1).
2. RESET: Ramsey’s test for functional form. It is distributed as χ 2 (1).
3. CUSUM: Cumulative Sum of Recursive Residuals.
4. CUSUMSQ: Cumulative Sum of Squares of Recursive Residuals.
5. Number inside the parenthesis next to a coefficient is absolute value of the t-ratio.
110 M. Bahmani-Oskooee and H. Harvey

As mentioned before, this long-run analysis would only be valid if we

establish cointegration. To this end, we shift to Table 2 and the results of
the F test along with other diagnostics. Given the critical value of 4.02 from
Narayan (2005), cointegration is supported only in four industries coded
292, 656, 841, and 896, since only in these industries is our calculated F
statistic above its critical value. In the remaining industries, following the
literature, we use normalized long-run coefficient estimates and Equation (1)
and calculate the error term, ECM. We then replace the combination of lagged
level variables in (2) by ECMt-1 and estimate the resulting model one more
time after imposing the same optimum lag structure selected before. A sig-
nificant and negative coefficient obtained for ECMt-1 not only will support
cointegration but also adjustment toward long-run equilibrium. Clearly, this
is the case in most industries.
A few other diagnostic statistics are also reported in Table 2. To make
sure that the residuals of each estimated model are free from autocorrelation,
we report the Lagrange Multiplier (LM) statistic. It is distributed as χ 2 with
one degree of freedom. Given the critical value of 3.84, only in four industries
(coded 632, 812, 896, and 931) is the LM statistic significant, implying that
the residuals of these four models are correlated. We also report Ramsey’s
RESET statistic to test for misspecification. The RESET statistic also has χ 2
distribution with one degree of freedom. It appears that almost all models
are correctly specified since only in three industries (653, 892, and 897) is
the RESET statistic significant. We also test for stability of all estimated coef-
ficients by applying the CUSUM and CUSUMSQ tests to the residuals of each
optimum error-correction model. While Bahmani-Oskooee et al. (2005) pro-
vide detailed explanations of these tests, we only report the final results
in Table 2 as “S,” indicating stable coefficients, and “US” as unstable ones.
Clearly, almost all estimated coefficients are stable. Finally, the adjusted-R2 is
reported for each optimum model to judge the goodness of fit.9

IV. SUMMARY AND CONCLUSION

Research on the relation between the trade balance and the real exchange
rate still continues by considering each country’s experience separately.
Studies that examined the Marshall-Lerner condition did not include
Indonesia in their sample. Those that relied upon establishing a direct link
between the trade balance and the real exchange rate using cointegration
analysis did not find any significant relationship either using aggregate trade
flows between Indonesia and rest of the world or between Indonesia and
most of her trading partners.

9
For the origin of the CUSUM and CUSUMSQ tests, see Brown et al. (1975) and for a sample that
represents industry 841, see Figure 1.
 The J-Curve 111

Plot of Cumulative Sum of Recursive Residuals

20

10

–10

–20
1978 1987 1996 2005 2011
The straight lines represent critical bounds at 5% significance level

Plot of Cumulative Sum of Squares of Recursive Residuals

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
–0.2
–0.4
1978 1987 1996 2005 2011
The straight lines represent critical bounds at 5% significance level

FIGURE 1 Plot of CUSUM and CUSUMSQ tests.

Suspecting that the previous research suffers from aggregation bias, in

this article we concentrated on the trade between Indonesia and the U.S.,
as one of its major trading partners, disaggregated the trade flows by com-
modity, and considered the experiences of 23 industries that conduct trade
between the two countries. These 23 industries engage in almost 50% of the
trade. Using annual data over the period 1973–2011 and a bounds testing
approach, we found that the trade balances of most industries are affected
by the exchange rate changes. The J-Curve effect (i.e., short-run deterioration
combined with long-run improvement in the trade balance) was observed in
nine industries, though they were all small industries in size. This finding
was masked by previous research which used aggregate trade data.
112 M. Bahmani-Oskooee and H. Harvey

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APPENDIX
Data Definition and Sources
Empirical analysis is based on annual data over the period 1973–2011. The
following sources are used to collect the necessary data:

1. World Bank
2. International Financial Statistics of the IMF

Variables
TBi = measure of the trade balance for industry i. It is defined as the ratio of
U.S. exports of commodity i to Indonesia over its imports of commodity i
from Indonesia. Industry-level trade flows come from source 1.
YINDO = Indonesia’s real GDP. Data come from source 2.
YUS = US real GDP. Data come from source 2.
REX = Real bilateral exchange rate between U.S. dollar and Indonesian
rupiah. It is defined as (PINDO • NEX/PUS ), where PUS is US CPI, PINDO is
Indonesia’s CPI, and NEX is the nominal bilateral exchange rate defined
as the number of U.S. dollars per rupiah. Thus, an increase in REX is a
reflection of real depreciation of the U.S. dollar. All CPI data and nominal
exchange rate data come from source 2.
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