EXCHANGE RATE RESPONSE TO INFLATION AND INTEREST RATES: SVAR APPROACH
Keywords:
exchange rate, inflation, interest rate, structural vector autoregression, IndonesiaAbstract
This study aims to analyze the response of the Indonesian rupiah exchange rate to inflation and interest rate shocks during the 2016–2025 period. The study uses monthly data obtained from Bank Indonesia (BI), Statistics Indonesia (BPS), and the Federal Reserve Economic Data (FRED). The analytical method employed is Structural Vector Autoregression (SVAR), complemented by Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analyses. The results indicate that inflation and interest rate shocks generate short-run responses in the rupiah exchange rate, although these effects gradually diminish over time. The FEVD results show that most of the variation in the exchange rate is explained by shocks to the exchange rate itself, while the contributions of inflation and interest rate shocks are relatively small. These findings suggest that the effects of inflation and interest rates on the exchange rate are limited in the short run, whereas exchange rate movements are largely driven by their own dynamics.
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