The nexus between foreign exchange and external debt in Indonesia: evidence from linear and nonlinear ARDL approaches

Abstract

We examine the long- and short-term effects of foreign exchange on Indonesia's external debts. Employing an autoregressive distributed lag (ARDL) bounds testing on quarterly data from 2010 to 2019 and testing for effect asymmetry, we found a long-run cointegrating relationship between the two variables. We also found a slow adjustment to an equilibrium state following a shock. Foreign exchange demonstrates a positive long-run effect on Indonesia's external debt, while in the short-run the effect is negative. Furthermore, we found an asymmetry in the elasticities of external debt with respect to rupiah-to-US dollar exchange rate fluctuations. The positive effect of Indonesian rupiah volatility on Indonesian external debt would be more severe when the rupiah appreciates against the dollar compared to a situation of rupiah depreciation. Therefore, although a depreciation of rupiah against the US dollar under a floating foreign exchange regime adopted by Indonesia since 1997 would in the long-run increase external debt, the impact is moderate. Any short-run movement of Indonesia's external debt following a shock would be pulled back to its long-run equilibrium path. We recommend that Indonesia should maintain a floating exchange regime and allow rupiah to depreciate at a moderate rate in the long-run.

Keywords:

• External debt
• foreign exchange
• ARDL
• NARDL
• Indonesia

JEL CLASSIFICATION:

• B22
• F31
• H63

Acknowledgments

We are thankful to the Institute of Research and Community Service of Universitas Syiah Kuala for partially funding this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

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Notes on contributors

B. S. Nazamuddin

B.S. Nazamuddin is an Associate Professor of Economics at the Department of Development Economics, the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. His primary research areas include macroeconomics, poverty, development, and econometrics.

Sri Sukma Wahyuni

Sri Sukma Wahyuni is an assistant lecturer at the Department of Development Economics, the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. She has been involved in numerous research projects with the university's Insitute of Research and Community Service and Bank of Indonesia.

F. Fakhruddin

F. Fakhruddin is a senior lecturer at the Department of Development Economics, the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. His research interest includes monetary and international economics.

F. Fitriyani

F. Fitriyani is an active researcher and lecturer at the Department of Development Economics, the Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia. Her research interest includes macroeconomics and econometrics.