Exchange Rate and Indonesia-China Bilateral Industry Trade Flows: J-Curve and Asymmetric Effects

Document Type : Research Paper

Authors

1 Mandiri Bank, Surabaya, Indonesia

2 Department of Economics, Universitas Airlangga, Surabaya, Indonesia

10.22059/ier.2023.336774.1007356

Abstract

This paper examines whether there is a J-curve phenomenon and an asymmetric effect of the exchange rate on the Indonesia-China bilateral industry trade balance. An asymmetric response occurs when the exchange rate affects trade balance differently during periods of currency depreciation or appreciation. An Autoregressive Distributed-Lag (ARDL) and Nonlinear Autoregressive Distributed-Lag (NARDL) models were applied using data from 50 Indonesian export industries between 1Q 1993 and 4Q 2019. We found that in the short run, there are 14 industries impacted by the real exchange rate changes (under the ARDL model), while the NARDL comes with more cases (22 industries). In the long run, the ARDL model reveals 13 industries with a significant impact on exchange rate changes. With a NARDL model, in the case of exchange rate depreciation, there are 15 industries, which experience significant influence on their trade balance, while in the case of exchange rate appreciation, the effect was found in 17 industries. From the perspective of J-Curve, the ARDL model came out with two industries, while with the NARDL model, a J-Curve effect occurs in nine industries. We also found empirical evidence for short-run asymmetric effects in 15 industries. The policy implication of this finding is the importance of maintaining exchange rate stability through monetary policy to reduce the adverse effect of sharp changes in exchange rates on the trade balance.

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