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2017 | OriginalPaper | Chapter

14. Real Exchange Rate, Trade Balance and Deindustrialization in Indonesia

Authors : Fithra Faisal Hastiadi, Amelia Nurunnisa

Published in: Towards A Common Future

Publisher: Springer Singapore

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Abstract

This chapter raises the current issues in Indonesia that link the instability of exchange rates to the deindustrialization phenomenon. This association has not been studied directly in previous studies. This chapter finds that these problems are interrelated and cannot be separated from each other. Deindustrialization problems in Indonesia, which are explained by the decline in manufacturing exports, decline in manufacturing labour productivity, the trade balance deficit and investment displacement from the tradable sector (manufacturing), directly and indirectly affect the exchange rate. The implication of this chapter is that government should pay attention to the Indonesian manufacturing sector in solving the exchange rate problem.

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Rupiah is the Indonesian exchange rate, symbolized by IDR.

Real Effective Exchange Rate (REER) is an approach to assessing the value of the exchange rate; the country’s trade value relative to its trade partners becomes a tool of adjustment.

Referring to World Bank, manufacturing output is defined as commodities classified in Standard International Trade Classification (SITC) revision 3 sections 5 to 8 except the 68 division.

Instead of utilizing all oil and gas production for domestic use, Indonesia also exports some oil and gas given the insufficient capacity of the existing domestic refineries and incompatibility with their specification.

Inflation Targeting Framework means a country’s inflation target is explicitly announced by the monetary authority. ITF is used to achieve the operational target of monetary policy in Indonesia.

Monetary authority of Indonesia.

Previously, Indonesia focused its commodity export on the advanced economies.

The Jakarta Post reported on January 13, 2015 citing Muliaman Hadad, chairman of Indonesia’s Financial Services Authority.

SNL Financial is the premier provider of breaking news, financial data and expert analysis on business sectors critical to the global economy: Banking, Insurance, Financial Services, Real Estate, Energy, Media & Communications, and Metals & Mining. SNL’s business intelligence service provides investment professionals, from leading Wall Street institutions to top corporate management, with access to an in-depth electronic database.

It is significant at the 10% significance level.

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Title: Real Exchange Rate, Trade Balance and Deindustrialization in Indonesia
Authors: Fithra Faisal Hastiadi
Amelia Nurunnisa
Publisher: Springer Singapore
Book: Towards A Common Future
Print ISBN: 978-981-10-5591-1

Electronic ISBN: 978-981-10-5592-8

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-981-10-5592-8_14