DYNAMICS OF INDONESIA'S FOREIGN EXCHANGE RESERVES IN THE FACE OF EXCHANGE RATE AND EXPORT SHOCKS
Keywords:
VECM, Foreign Exchange Reserve, Exchange Rate, Exports, Macroeconomic ShocksAbstract
Foreign exchange reserves are a fundamental instrument of macroeconomic policy, particularly for Indonesia as an open economy with a managed float exchange rate. Rupiah exchange rate volatility and export performance, particularly in primary commodities such as coal, palm oil, and nickel, have made foreign exchange reserves increasingly vulnerable to external shocks, as reflected in periods of historical stress such as the 1997-1998 Asian Crisis and the COVID-19 pandemic. This study aims to systematically analyze how exchange rate and export shocks affect the dynamics of Indonesia's foreign exchange reserves within a structural time series model.
The study uses a quantitative approach with the Vector Error Correction Model (VECM) method based on monthly data from January 1990 to December 2023 (405 effective observations), sourced from the Federal Reserve Economic Data (FRED). The variables for foreign exchange reserves, exports, and the IDR/USD exchange rate are transformed into natural logarithms and tested using ADF, Phillips-Perron, Johansen cointegration tests, and Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analyses.
All variables are confirmed to be integrated at order one, I(1), with one significant cointegration vector (trace statistic 33.66 > 5% critical value of 29.68). The long-run elasticity of exports to foreign exchange reserves of 1.04 indicates a nearly proportional relationship. The error correction term coefficient of -0.0347 indicates an adjustment speed of 3.47% per month (half-life ±20 months). In the short run, the Rupiah depreciation one month earlier was shown to reduce foreign exchange reserves (-0.0857) while increasing exports (0.5383), confirming Bank Indonesia's countercyclical intervention and exchange rate transmission to export competitiveness.
The results of this study confirm that Indonesia's foreign exchange reserves are determined by the dynamic interaction between export performance and exchange rate volatility, with a transmission mechanism across various timescales. Sustainable strengthening of foreign exchange reserves requires a comprehensive strategy, including export diversification into high value added manufacturing products, sound exchange rate management, and strengthening foreign exchange export (DHE) policies. Further research is recommended, applying the Nonlinear VECM and comparative studies with ASEAN countries.
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