The role of crude oil prices in the movement of the Indonesian rupiah: a quantile ARDL approach
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The role of crude oil prices in the movement of the Indonesian rupiah: a quantile ARDL approach Jungho Baek1 Received: 16 June 2020 / Accepted: 30 September 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract The linkages between oil prices and exchange rates have been researched considerably. However, studies to date typically assume symmetric responses of exchange rates to changes in crude oil prices and use a symmetric linear regression model when tackling the topic. Therefore, the new contribution of this article is to utilize the quantile autoregressive distributed lag approach newly developed by Cho et al. (J Econom 188:281–300, 2015) and investigate whether or not evidence of locational asymmetries exists between oil prices and the Indonesian rupiah (IDR). We detect that the relationship between oil prices and IDR is heterogeneous across different quantiles, thereby providing evidence of locational asymmetries in both the longand short-run. We believe that this discovery has profound implications on empirical modeling of the oil price–exchange rate nexus and policy analysis. Keywords Indonesia · Oil prices · Quantile ARDL · Rupiah JEL Classification C22 · F31 · Q43
1 Introduction The real appreciation (depreciation) of the Indonesian rupiah (IDR) against USD and the increase (decline) in the price of crude oil appeared to go hand in hand over the past two decades (Fig. 1). The price of Brent crude, for instance, was $13 a barrel in 1998, but it went up to $65 a barrel in 2006 and almost $100 a barrel in 2008. With an uninterrupted growth in the price of crude oil, the value of IDR has appreciated approximately 52% against the U.S. dollar between 1998 and 2008. After crude oil prices peaked at $112 a barrel in 2012, the era of oil price decline started. As a result, IDR depreciated from IDR 8995 per the U.S. in 2012 to IDR 9548 per the * Jungho Baek [email protected] 1
Department of Economics, School of Management, University of Alaska Fairbanks, Fairbanks, USA
13
Vol.:(0123456789)
Economic Change and Restructuring 120
25,000
100
Brent
80
15,000 60
U.S. Dollar
Indonesian Rupiah to U.S. Dollar
20,000
10,000 40
Exchange Rate 5,000
-
20
0
Fig. 1 Exchange rate of Indonesian rupiahs to U.S. dollar and Brent oil price. Source: International Financial Statistics (IIFS) and U.S. Energy Information Administration (EIA)
U.S. in 2013 and continued to decline until 2015. Therefore, an interesting research question would be certain to arise from this observed correlation: Do changes in oil prices really matter to the movement in the Indonesian rupiah? The answer to this question is of great policy significance as it is central to the implementation of effective macroeconomic and industrial policies. If it is proven that an upsurge in the price of crude oil positively affects Indonesia’s real incomes and hence results in a real appreciation of IDR, any policies implemented by the Indonesian government aiming at boosting growth via deliberate currency depreciatio
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