US–Indonesia trade at commodity level and the role of the exchange rate

Abstract

Previous studies that assessed the impact of currency depreciation on inpayments and outpayments of Indonesia with her major trading partners did not find much significant results, especially in the trade with the United States. We wonder whether insignificant link between the real rupiah-dollar rate and Indonesia’s inpayments and outpayments with the United States is due to aggregation bias. To answer this question, we disaggregate the trade flows between the two countries by commodity and consider the sensitivity of inpayments of 108 US exporting industries and outpayments of 32 US importing industries from Indonesia. We find that most industries respond to exchange rate changes in the short run. In the long run, however, 32 inpayments schedule and 17 outpayments schedule are significantly affected. A 1% real depreciation of the dollar was found to improve US trade balance by 1.8%.

Keywords:

• US
• Indonesia
• commodity trade
• exchange rate

JEL Classification:

• F30
• F31

Notes

¹ ASEAN (Association of South East Asian Nation).

² Refer to Bahmani-Oskooee and Ratha (2004) and Bahmani-Oskooee and Hegerty (2010) for a review.

³ The trading partners were Australia, Canada China, Hong Kong, Japan, Korea, Malaysia, New Zealand, the Philippines, Saudi Arabia, Singapore, Thailand, the United States and the United Kingdom.

⁴ China, Japan, Malaysia, New Zealand, the Philippines and Singapore.

⁵ Haynes et al. (1986) and Cushman (1987) are other studies that have estimated inpayments and outpayments schedules for other countries.

⁶ Note that since data are reported by the United States, her inpayments are Indonesia’s outpayments and US outpayments are Indonesian inpayments.

⁷ Note that VX^US = P^XX and VM^US = P^MM from Equation 1.

⁸ As the Appendix shows a decline in REX reflects a real depreciation of the dollar. As mentioned in the Appendix, a decline in REX reflects a real depreciation of the dollar.

⁹ This could easily be inferred by solving Equations 2 and 3 for the error terms and lagging the solutions by one period.

¹⁰ For other applications of this approach, see 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), Chen and Chen (2012) and Wong (2013).

¹¹ http://results.usaid.gov/indonesia

¹² Components of economic development are agriculture, economic opportunity and infrastructure, macroeconomic foundation for growth and trade and investment. The biggest recipient is agriculture, which is 68 million dollars.

¹³ For more details of the CUSUM and CUSUMSQ tests and their graphical presentations, see Bahmani-Oskooee et al. (2005).

¹⁴ 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), Narayan and Narayan (2005) and Narayan et al. (2007).