Real Exchange Rate Misalignment and Currency Crises

Abstract

This article calculates the real exchange rate misalignment (RERM) of the rupiah to examine the role of misalignment in exchange rate crises in Indonesia. The article does this by employing an autoregressive regime-switching model and behavioural equilibrium exchange rate (BEER) approach. The findings are as follows. First, net foreign assets and the relative productivity differential between sectors significantly influence the equilibrium exchange rate, indicating that external and internal balance determine the behaviour of the rupiah in the long run. Second, the BEER approach can properly predict misalignment of the rupiah, especially through explaining the overvaluation periods of the rupiah before the Asian financial crisis. The regime switching model performs well in identifying episodes of stability and volatility in the rupiah. Third, of the 17 crisis episodes experienced in Indonesia in 1981–2012, 10 were preceded by high RERM.

Tulisan ini menghitung ketidakselarasan nilai tukar (RERM, real exchange rate misalignment) rupiah untuk menelaah peran ketidakselarasan di krisis nilai tukar di Indonesia. Penulis menggunakan pendekatan autoregressive regime switching model dan behavioural equilibrium exchange rate (BEER). Beberapa temuannya adalah sebagai berikut. Satu, modal asing neto dan perbedaan produktivitas relatif antar sektor secara signifikan mempengaruhi keseimbangan nilai tukar, mengindikasikan bahwa keseimbangan eksternal dan internal menentukan perilaku rupiah di jangka panjang. Dua, pendekatan BEER dapat secara tepat memprediksikan ketidakselarasan rupiah, khususnya melalui penjelasan akan periode kelebihan evaluasi dari rupiah sebelum Krisis Keuangan Asia. Model regime switching memiliki kinerja yang lebih baik dalam mengklasifikasi episode Rupiah yang stabil dan yang fluktuatif. Tiga, dalam 17 episode krisis, 10 didahului oleh tingginya RERM.

Keywords:

• real exchange rate misalignment
• currency crises
• balance of payments
• regime switching
• behavioural equilibrium exchange rate

JEL classifications:

• F30
• F31
• F41

Notes

1 To calculate the standard deviation of the RER, one should involve the whole observation of the RER at each point in time to get a certain threshold, such as 1.5 mean × σ. One can then determine whether the RER in a quarter is below or above the threshold. This means that the future conditions will determine whether this point in time (in the past) is defined as a crisis period.