ANALISIS INTERAKSI FLUKTUASI MATA UANG TERHADAP KINERJA EKSPOR DAN IMPOR DI NEGARA ASEAN-5
UNDERGRADUATE THESIS
By:
SATRIADJIE SARWO GUMILAR 20120430103
ECONOMICS FACULTY
INTERNATIONAL PROGRAM FOR ISLAMIC ECONOMICS AND FINANCE (IPIEF)
ANALISIS INTERAKSI FLUKTUASI MATA UANG TERHADAP KINERJA EKSPOR DAN IMPOR DI NEGARA ASEAN-5
UNDERGRADUATE THESIS
Submitted as the fulfillment on the requirement for Bachelor degree of Economics at the International Program for Islamic Economics and Finance (IPIEF) Department of Economics, Faculty of Economics University of Muhammadiyah
Yogyakarta
By:
SATRIADJIE SARWO GUMILAR 20120430103
ECONOMICS FACULTY
INTERNATIONAL PROGRAM FOR ISLAMIC ECONOMICS AND FINANCE (IPIEF)
“Berubah atau punah? Kritikan itu hal yang biasa bagi orang yang berpikir.”
— Ali Sadikin
“Every saint has the past, and every sinner has a future.”
—Oscar Wilde
“I learn the most from making my own mistakes.”
— David Fincher
“It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.”
First and foremost, all praises to Allah for the strengths, the patience and His blessing in completing this undergraduate thesis. Peace and blessing of Allah be upon last Prophet Muhammad (Peace Be upon Him).
This undergraduate thesis entitled “Analysis of The Interaction of
Exchange Rate Fluctuations towards the Exports and Imports Performance in ASEAN-5 Countries” has been kept on track and seen through to completion with the support and encouragement of numerous people. Therefore, the researcher wants to give special appreciation to the related parties in supporting the accomplishment of this research:
1. The honorable Prof. Dr. Bambang Cipto, M.A., as the Rector of Universitas Muhammadiyah Yogyakarta.
2. Dr. Nano Prawoto, S.E., M.Si., as the Dean of Faculty of Economics. 3. Dr. Masyhudi Muqorobin, S.E., Akt.,M.Ec., as the Director of
International Program for Islamic Economics and Finance in Universitas Muhammadiyah Yogyakarta.
Mr. Umar, and Mrs. Linda Kusumastuti, S.E.
6. For my parents especially to my mother Neny Irmawati who gave so much effort for my studies. Thank you for all the patients, supports, caring and everything I need. For my father Heru Subiyanto and my only younger sister Mojo Putri Sekar Kedaton. Wish we could reach our dream and keep supporting each other as a family.
7. For my family in SunShine Voice UMY, especially for 15th batch members, and all my brothers and sisters in the organization. I’ve learn so much things from you guys.
8. For all the IPIEF 2012 class members. Fitra, Bima, Puguh, Bayu, Irfan, Ardi, Yusuf, Adini, Fanny, Caca, Dyah, Widhia, Andika, Nurul, Lia, and all the colleague brothers and sisters in IPIEF.
9. For all mates in Yogyakarta, Fauzi, Marilda, Dody, Amel, Sayogi, Ovi, and brother uki, especially for Ageng Cahya, who want to shares all of the emotional feelings, passing through the ups and downs, and thank you for all the supports provided.
Yogyakarta, August 12th, 2016
SUPERVISORS AGREEMENT PAGE ..……… ii
EXAMINER COMMITTE AGREEMENT PAGE……… iii
DECLARATION PAGE…...……… iv
MOTTO PAGE ………. v
TRIBUTE PAGE ……….. vi
ABSTRACT……….. vii
ACKNOWLEDGEMENT……… viii
TABLE OF CONTENTS……….. x
LIST OF TABLE ……….. xii
LIST OF FIGURE………. xiii
CHAPTER I INTRODUCTION………..……… 1
1.1 Background ...………..…….. 1
1.2 Limitations of Research...………..……… 6
1.3 Research’s Problem ……….……….… 6
1.4 Purposes of Research …..……….….…..…. 7
1.5 Research’sOutline.……… 7
CHAPTER II LITERATURE REVIEW……… 9
2.1 Theory……… 9
2.2 Previous Studies……… 27
2.3 Theoretical Framework………. 29
2.4 Hypothesis……… 32
CHAPTER III RESEARCH METHODOLOGY……….. 33
3.1 Research’s Object ………. 33
3.2 Data Types ..……….... 33
3.3 Technique of Data Collection……….. 34
3.4 Operational Definition of Researched Variables……….. 34
5.1 Conclusion ..……… 75
5.2 Suggestion……… 77
REFERENCES…….………...…………... 78
2.1 Absolute Advantages………. 20
2.2 Comparative Advantages ………..………... 22
2.3 Previous Studies………..……… 27
3.1 Observed Variables…….……….……… 35
4.1 Unit Root Test………. 50
4.2 Optimal Lag Length Criteria ………. 51
4.3 Cointegration Test ………. 52
4.4 Cointegration Test 2……… 53
4.5 Granger Causality Test………...……….. 55
4.6 Short-term VECM Estimation……… 58
4.7 Long-term VECM Estimation………….……… 59
2.2 Research Framework ………..……… 32
3.1 VAR/VECM Analysis Process ……… 41
4.1 Singapore’s Trade Balance……… 44
4.2 Malaysia’s Trade Balance……….…………... 45
4.3 Thailand’s Trade Balance………... 46
4.4 Indonesia’s Trade Balance………...………... 47
4.5 Philippine’s Trade Balance ………... 48
4.6 Singapore IRF (graph) ………... 67
4.7 Malaysia IRF (graph) ……….………... 67
4.8 Thailand IRF (graph) ……….………... 68
4.9 Indonesia IRF (graph) ……… 69
exchange rate and trade balance performance in selected ASEAN-5 countries
from 2005 to 2015. It is including the exports, imports, and nominal exchange
rate data from each country. This study uses Unit Root Tests, Cointegration
techniques, Engle-Granger test, Vector Autoregression (VAR) and Vector Error
Correction Model (VECM), impulse-response, and variance decomposition
analysis. The findings of this research are: (i) The exports and imports are
co-integrated in all selected ASEAN-5 countries. Thus, it implies that all the
countries are not in violation in their international budget constrains, and that
trade imbalances are short-term phenomena which is sustain in the Long-term.
(ii) in impulse-response and variance decomposition analysis, it is indicates that
the trade balance variables are not really influence the exchange rate volatility in
most of the selected countries.
CHAPTER I INTRODUCTION
1.1 Background
The South East Asian countries has established the Association of South
East Asia Nation (ASEAN) as a regional organization with the aim to increasing
regional economic growth. ASEAN was founded in Bangkok Declaration on August 8th, 1967 by five countries i.e. Indonesia, Malaysia, Thailand, Singapore, and Philipine which called as ASEAN-5. ASEAN are become more solid with the establishment of 9th ASEAN summit in Bali on 2003 with the final achievement to declare Bali Concort II to attain full integration of ASEAN countries on 2020 in the ASEAN community forum. The ASEAN community has three main pillars i.e. politic and security cooperation, economic cooperation, and socio-cultural cooperation. Through economic cooperation the ASEAN economic convergence are expected in the form of ASEAN Economic Community (AEC) indicated by the movement of current goods, services, capital and invesment are flowing freely without any restriction. (Pratiwi, 2015)
foundation. According to Mundell-Fleming model rules that for small open economy, if there is incurring exchange rate fluctuations, for instance an exchange rate tends to appreciate, theoretically such condition would hurt export and conversely endorse import. This standard textbook theory and its prescriptions assume that markets are perfect and prices are given by world markets. In macroeconomic view points we can say that export would be more interesting for economic because it will encourage the trading within the country and increasing the value of export based trading. In shortly, the Mundell-Fleming theory taking the assumption that when the exchange rate get fluctuated in such case apreciating, it will decrease the value of export in the country because it will increase the price of goods and services within the country. Conversly, when the nominal exchange rate depreciating it will increasing the value of export, and import value will decrease. (Kusuma, 2010)
condition would drive up the demand for domestic money which later increasing the domestic currency. In order to maintain the currency stable, macroeconomic stability and fundamental factors becomes the focal point and become a very important component for ASEAN-5, especially in the face of global challenges and international competition. Moreover, if there is any exogenous factors that could harm the economy through exchange rate fluctuations. Fundamental economic condition as the indicator that the country can withstand the external economic turmoil has to be in a good performance. However, the characteristic of ASEAN-5 countries has differ one another. Thus, the way they response to the external economic turmoil are different. Table 1.1 shows the ASEAN-5 economic indicators for 2005 and 2014.
Table 1.1
ASEAN-5 Indicators for 2005 and 2014
Country
Source: Asean Development Bank
In 2009, the Global Financial Crisis (GFC) reduced demand for exports of Southeast Asian countries, where exports is a major growth driver. Recession in developed countries led to contraction in output of Asian countries through export shortfalls. Expansionary and accommodative monetary policy in response to recession in developed areas, through low interest rates and liquidity injection caused massive capital inflows to Southeast Asia. Consequently, Southeast Asian currencies appreciate substantially and exacerbated export downturn (Bhanupong, 2012).
However, According to Abeysinghe and Yeok, (1998) they argue that the higher the imported input content, the less would be the impact of exchange rate fluctuation on exports. Exchange rate apprectiation considered would have nothing to do with export, whilst, currency depreciation would have some what raise the export. However, the export rising during the period of currency appreciation could be backed up from one of the following possibilities or combinations of them. First, the import content of exports could have been relatively large so that exports were little affected. Second, external demand of goods and services could have been rising as the countries could able to defferentiate the product. Third, the countries could be rising their productivity. Fourth, pricing-to-market policies could have countered the negative effects of currency appreciation.
The relationship can be discerned fromits convergence or econometrically being called as its co-integration which later suggests co-existence of co-integrating vector between exports and imports are implied that a country is not in violation of her international budget constraints and any trade imbalances are only a short-run phenomena so that the equilibrium instituted in the long short-run are sustainable.
In brief, the correlation between exchange rate fluctuations and trade balances are seemingly correlated as the sustainability of trade is indicated by how strong its currency fluctuations precipitated and how far the existence of a productivity gap takes place. The productivity gap would drive up both exchange rate and interest rate abroad. Consequently, for developing countries the export would decrease, and investment as the effect of interest rate will go down as well. Conversely, the import and saving would increase as the influence of exchange rate and interest rate jointly. For additional, the high saving gap would affect to the shortfall of productivity domestically. For an export-oriented countries, the wide saving gap also would affect to the external sector disequilibrium. In short, the final effect of these movements is increasing the amount of debt. (Kusuma, 2010)
Rate Fluctuations Towards Exports and Imports Performance In ASEAN-5 Countries”.
1.2 Limitations of Research
Since the topic are quitely general. The author want to restrict the research problem that might arised. The research are limited to several point of study,
1. Focus on the trade balance performance and exchange rate of ASEAN-5 namely; Singapore, Malaysia, Thailand, Indonesia, and Philippine. 2. The variables used are exports, imports, and nominal exchange rate. 3. The data used for the research are monthly data spaning from 2005:M1
until 2015:M12.
1.3 Research’s Problems
Shortly, this research have some question remark in respect to search some empirical evidence of the topic, the impact of exchange rate flutuation on the export and import performance in ASEAN-5 countries. The questions are;
1. Does the export and import in ASEAN-5 countries co-integrated? 2. Does the nominal exchange rate fluctuationss have a significant effect
1.4 Purposes of Research
As the research questions arised, the aims of this research want to make sure of two things;
1. To analyze the existence of co-integration relationship between exports and imports in ASEAN-5 countries.
2. To analyze if there is bidirectional relationshipbetween exchange rate and trade balance performance.
1.5 Research’s Outline
In order to deepy understanding this undergraduate thesis, the author made this reserach outline so the reader can fully understand this research. Research outline of this undergraduate thesis are devided into several chapters which represented each materials.
Chapter I, Introduction; this chapter describes the general information that the research background, problem formulation, purpose and benefits of the research, the scope of research, time and place of study, research methodology, and systematic research.
Chapter III, Research Methodology; This chapter contains the definition of variables that used in this research, data and the source, the methodology of co-integration test analysis and Vector Error Correction Model (VECM).
Chapter IV, Research Findings; this chapter describes the general overview of the research. Finding some empirical evidence from the analytical study. It also contains the result from the analysis of co-integration test and vector error correction model (VECM), the result table and diagram, the analysis of empirical result with the theoretical framework and previous study.
CHAPTER II
LITERATURE REVIEW
2.1 Theory
2.1.1 Exchange Rate
Exchange rate is the price of a countries currency in terms of another countries currency. The exchange rate between two countries is the price at which residents of those countries trade with each other. The exchange rate includes of two component, those are Nominal Exchange Rate and Real Exchange Rate. Nominal Exchange Rate is the relative price of the currencies of two countries. While Real Exchange Rate is the relative price of goods in two countries (Mankiw, 2006).
The exchange rate is the ratio between the prices of the currency of a country with the currency of other countries. For example, rupiah exchange rate against U.S. dollar show how the rupiah needed to be switched with one American dollar. (Musdholifah & Tony, 2007). Exchange rates is the exchange between two different currencies, namely the value or price comparison is between the two currencies. (Triyono, 2008).
rupiah against foreign currencies will lead to rising costs of imported raw materials to be used for production and also increase the interest rates.
A drop in the currency reflects declining demand of domestic currency because of the declining role of the national economy or because of the growing demand for foreign currency ($US) as means of international payments. Strengthened currency to some extent means describing the performance of money market increasingly showed improvement. As the impact of rising inflation rate then the domestic exchange rate weakened against foreign currencies. This resulted in a decrease in the performance of an enterprise and investment in capital markets be reduced.
To see the relation between the real and nominal exchange rates, consider a single good produced in many countries: cars. Suppose an American car costs $10,000 and a similar Japanese car costs 2,400,000 yen. To compare the prices of the two cars, we must convert them into a common currency. If a dollar is worth 120 yen, then the American car costs 1,200,000 yen. Comparing the price of the American car (1,200,000 yen) and the price of the Japanese car (2,400,000 yen), we conclude that the American car costs one-half of what the Japanese car costs. In other words, at current prices, we can exchange 2 American cars for 1 Japanese car.
� � � ℎ� �� = �120 � �×�10,000
�
� � � � � �2,400,000Japanese caryen �
At these prices and this exchange rate, we obtain one-half of a Japanese car per American car. More generally, we can write this calculation as
� � � ℎ� ��
= � � ℎ� � ×� � �
� � �
The rate at which exchange foreign and domestic goods depends on the prices of the goods in the local currencies and on the rate at which the currencies are exchanged.The real exchange rate between two countries is computed from the nominal exchange rate and the price levels in the two countries. If the real exchange rate is high, foreign goods are relatively cheap, and domestic goods
are relatively expensive. If the real exchange rate is low, foreign goods are
relatively expensive, and domestic goods are relatively cheap. (Mankiw, 2006).
Real Exchange Rate = Nominal Exchange Rate × Ratio of Price Leve
e = e × (P/P*)
This equation shows that the nominal exchange rate depends on the real exchange rate and the price levels in the two countries. Given the value of the real exchange rate, if the domestic price level P rises, then the nominal exchange rate e will fall: because a dollar is worth less, a dollar will buy fewer yen. However, if the Japanese price level P* rises, then the nominal exchange rate will increase: because the yen is worth less, a dollar will buy more yen.If a country has a high rate of inflation relative to the United States, a dollar will
buy an increasing amount of the foreign currency over time. If a country has a
low rate of inflation relative to the United States, a dollar will buy a decreasing
2.1.2 Exchange Rate Regime
Exchange rate regime refers to the ‘way’ the value of the domestic currency in term of foreign currencies is determined. It is closely related to monetary policy and the two are generally dependent on many of the same factors. Exchange rate regimes can broadly be categorized into two extremes, namely fixed and floating. Exchange rate regimes are typically divided into three broad categories.
At one end of the spectrum are hard exchange rate pegs (Fixed Exchange Rate).These entail either the legally mandated use of another country’s currency (also known as full dollarization) or a legal mandate that requires the central bank to keep foreign assets at least equal to local currency in circulation and bank reserves (also known as a currency board). Panama, which has long used the U.S. dollar, is an example of full dollarization, and Hong Kong SAR operates a currency board. Hard pegs usually go hand in hand with sound fiscal and structural policies and low inflation. They tend to remain in place for a long time, thus providing a higher degree of certainty for pricing international transactions. However, the central bank in a country with a hard exchange rate peg has no independent monetary policy because it has no exchange rate to adjust and its interest rates are tied to those of the anchor-currency country.
narrow (+1 or -1 percent) or a wide (up to +30 or –30 percent) range, and in some cases, the peg moves up or down over time, usually depending on differences in inflation rates across countries. Costa Rica, Hungary, and China are examples of this type of peg. Although soft pegs maintain a firm “nominal anchor” (that is, a nominal price or quantity that serves as a target for monetary policy) to settle inflation expectations, they allow for a limited degree of monetary policy flexibility to deal with shocks. However, soft pegs can be vulnerable to financial crises which can lead to a large devaluation or even abandonment of the peg and this type of regime tends not to be long lasting.
A floating exchange rate, by definition results in an equilibrium rate of exchange that will move up and down according to a change in demand and supply forces. The process by which currencies float up and down following a change in demand or change in supply forces is, thus, illustrated in figure 2.1
Assume that national income rises. This results in an increase in the demand for imports of goods and services and, hence, demand for dollar rises. This result in a shift in the demand curve from DD1 to DD2. Consequently, exchange rate rises as from OP to OP1determined by the intersection of new demand curve and supply curve.
2.1.3 Exports
Exports are the goods and services made in one country and transmitted to the other countries by trading. The sale of such goods adds to the producing nation's gross output. If used for trade, exports are exchanged for other products
P
S1
S P1
D D
O
E1 E
D2 D1 M1
M Figure 2.1
or services. Exports are one of the oldest forms of economic transfer, and occur on a large scale between nations that have fewer restrictions on trade, such as tariffs or subsidies.
Exports is selling the domestic product produced by domestic producer to the oversea or out of the state. Out of State means, out of the customs area of the country or out of the jurisdiction of the State (Purba, 1997). Export is the attempt of doing the sales that the country have to deliver the goods or servicesto foreign country in accordance with the provisions of the Government expects payment in foreign currency (Amir, 2004). So the results obtained from the exporting activity is either a value of an amount of money in foreign currency or foreign exchange, which is also one of the sources of revenue of the state. So the export trade activities is stimulating the domestic demand that causes the shockof large factory industries, along with a stable positive structures and efficient social institution (Todaro, 2000).
Export is one of the sectors of the economy that play an important role through the expansion of markets and industrial sectors that will encourage other industrial sector and economy (Meier, 1996:313). In conclusion, export is a source of foreign exchange for market expansion plus the production of domestic goods and the expansion of the labor (Marie Muhammad, www.fiskal.depkeu.go.id). In Robert Mundell’s theory of open economy state
through this assumption many states stripped to open their economic and conducting international trade in order to achieves the export expansion.
There are at least three roles of export in the economy;
• Expanding several product to the worldwide market in order to
achieves the economic growth, as mantioned by the clasical economic theory which state that, an industry can grow quickly if the industry can sell the results across oceans rather than only in the narrow country market.
• Export creates new effective demand. So, the domestic producers are
looking for innovations that are intended to increase productivity. • Expansion of export activities facilitates development, because of the
narrowness of the domestic market due to a low rill income level or the relationship of adequate transportation.
Thus, beside of increasing the domestic production, exports increasing the domestic demand as well. Effective demand which constitute demand with the ability to buy from the people, can effect the welfare of the country. So that the external demand indirectly affect the domestic producers to optimizing their production.
2.1.6.1 Exports Type
According to Mankiw (2010), there are two type of exports, namely; a. Direct Export
export. Sales made through a distributor and representative of company sales. The benefit, the production is centered in the State of origin and the control of distribution is better. The disadvantage, transport costs are higher for products on a large scale and the presence of trade barriers and protectionism.
b. Indirect Export
Indirect export is a technique where the goods sold through intermediary or exporter country of origin then sold by middlemen. Through the export company's management, and exporting companies. The benefits of concentrated production resources, and do not need to handle export directly. His weaknesses, control over distribution less and knowledge against the operation in other countries are less.
2.1.4 Imports
Import is a good or service brought into one country from another. The word "import" is derived from the word "port," since goods are often shipped via boat to foreign countries. Along with exports, imports form the backbone of international trade; the higher the value of imports entering a country, compared to the value of exports, the more negative that country's balance of trade becomes.
domestic goods and foreign goods. Imports are contrast with exports. We can say that exports is injection to the economics, but imports is vice versa.
= ∆ �∆
Where is
= Marginal propensity to consume,
∆ = added imports,
∆ = added exports.
Imports are determined by the ability to produce the product that can compete the foreign product. Which mean, the imports value is depend on national income. The highest the national income, the weakest ability to produce the domestic product, which mean the highest country will imports. It will impact to the negative trade balance and national income. The relationship between imports and national income will be explain in this equation.
= +
Where : = Total Exports
= Unaccounted total export
= Marginal propensity to import
2.1.5 The Real Exchange Rate and the Trade Balance
Suppose first that the real exchange rate is low. In this case, because domestic goods are relatively cheap, domestic residents will want to purchase fewer imported goods. For the same reason, foreigners will want to buy many of our goods. As a result of both of these actions, the quantity of our net exports demanded will be high. The opposite occurs if the real exchange rate is high. Because domestic goods are expensive relative to foreign goods, domestic residents will want to buy many imported goods, and foreigners will want to buy few of our goods. Therefore, the quantity of our net exports demanded will be low.
We write this relationship between the real exchange rate and net exports as.
= (�)
This equation states that net exports are a function of the real exchange rate. From the explaination above, there are two analysis that explain what factors that determine the real exchange rate. (Mankiw, 2006)
• The real exchange rate is related to net exports. When the real exchange
rate is lower, domestic goods are less expensive relative to foreign goods, and net exports are greater.
• The trade balance (net exports) must equal the net capital outflow, which in
function and fiscal policy; investment is fixed by the investment function and the world interest rate.
2.1.6 Theories
2.1.6.1 Trade Based on Absolute Advantage: Adam Smith
According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than (or has an
absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other
nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage. Adam Smith (and the other classical economists who followed him) believed that Free trade would cause world resources to be utilized most efficiently and would maximize world welfare.
The illustration of absolute advantages theory will be shown below:
Table 2.1 Absolute Advantages
U.S. U.K.
Wheat (bushels/hour) 6 1
Cloth (yards/hour) 4 5
Source: D. Salvatory 11th edition (page 35)
United States. Thus, the United States is more efficient than, or has an absolute advantage over, the United Kingdom in the production of wheat,
whereas the United Kingdom is more efficient than, or has an absolute
advantage over, the United States in the production of cloth. With trade, the
United States would specialize in the production of wheat and exchange part
of it for British cloth. The opposite is true for the United Kingdom.
If the United States exchanges six bushels of wheat (6W) for six
yards of British cloth (6C), the United States gains 2C or saves 1/2 hour or
30 minutes of labor time (since the United States can only exchange 6W for
4C domestically). Similarly, the 6W that the United Kingdom receives from
the United States is equivalent to or would require six hours of labor time to
produce in the United Kingdom. These same six hours can produce 30C in
the United Kingdom (6 hours’ times 5 yards of cloth per hour). By being
able to exchange 6C (requiring a little over one hour to produce in the
United Kingdom) for 6W with the United States, the United Kingdom gains
24C, or saves almost five labor - hours.(D. Salvatory 11th edition, 2012)
2.1.6.2 Trade Based on Comparative Advantage: David Ricardo
According to the law of comparative advantage, even if one nation is less efficient than (has an absolute disadvantage with respect to) the other
nation in the production of both commodities, there is still a basis for mutually beneficial trade. The first nation should specialize in the production
commodity in which its absolute disadvantage is greater (this is the commodity of its comparative disadvantage).
The illustration of comparative advantages will be show below:
Table 2.2
Comparative Advantages
U.S. U.K.
Wheat (bushels/hour) 6 1
Cloth (yards/hour) 4 2
Source: D. Salvatory 11th edition (page 37)
The only difference between Tables 2.2 and 2.1 is that the United
Kingdom now produces only two yards of cloth per hour instead of five.
Thus, the United Kingdom now has an absolute disadvantage in the
production of both wheat and cloth with respect to the United States.
However, since U.K. labor is half as productive in cloth but six times less
productive in wheat with respect to the United States, the United Kingdom
has a comparative advantage in cloth.
On the other hand, the United States has an absolute advantage in
both wheat and cloth with respect to the United Kingdom, but since its
absolute advantage is greater in wheat (6:1) than in cloth (4:2), the United
States has a comparative advantage in wheat. To summarize, the U.S.
absolute advantage is greater in wheat, so its comparative advantage lies in
wheat. The United Kingdom’s absolute disadvantage is smaller in cloth, so
its comparative advantage lies in cloth. According to the law of comparative
advantage, both nations can gain if the United States specializes in the
the same time, the United Kingdom is specializing in the production and
exporting of cloth.). (D. Salvatory 11th edition, 2012). 2.1.6.3 The Opportunity Cost Theory
In this form, the law of comparative advantage is sometimes referred to as the law of comparative cost. According to the opportunity cost theory, the cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity. No assumption is made here that labor is the only factor
of production or that labor is homogeneous. Nor is it assumed that the cost or price of a commodity depends on or can be inferred exclusively from its labor content. Consequently, the nation with the lower opportunity cost in the production of a commodity has a comparative advantage in that commodity (and a comparative disadvantage in the second commodity).(D. Salvatory 11th edition, 2012)
2.1.6.4 Heckscher–Ohlin Theory
The Heckscher–Ohlin theory is based on a number of simplifying assumptions (D. Salvatory 11th edition, 2012):
• There are two nations (Nation 1 and Nation 2), two commodities
(commodity X and commodity Y), and two factors of production (labor and capital).
• Both nations use the same technology in production.Both nations have
exactly the same amount of labor and capital in the production of each commodity. Since factor prices usually differ, producers in each nation will use more of the relatively cheaper factor in the nation to minimize their costs of production.
• Commodity X is labor intensive, and commodity Y is capital intensive in
both nations. Commodity X requires relatively more labor to produce than commodity Y in both nations. In a more technical and precise way, this means that the labor–capital ratio (L/K) is higher for commodity X than for commodity Y in both nations at the same relative factor prices. This is equivalent to saying that the capital–labor ratio (K/L) islower for X than for Y. But it does not mean that the K/L ratio for X is the same in Nation 1 and Nation 2, only that K/L is lower for X than for Y in both nations. • Constant returns to scale in the production of both commodities in both
nations. increasing the amount of labor and capital used in the production of any commodity will increase output of that commodity in the same proportion. For example, if Nation 1 increases by 10 percent both the amount of labor and the amount of capital that it uses in the production of commodity X, its output of commodity X will also increase by 10 percent. If it doubles the amount of both labor and capital used, its output of X will also double. The same is true for commodity Y and in Nation 2.
• Incomplete specialization in production in both nations. even with free
• Equal tastes in both nations. demand preferences, as reflected in the shape
and location of indifference curves, are identical in both nations. Thus, when relative commodity prices are equal in the two nations (as, for example, with free trade), both nations will consume X and Y in the same proportion.
• Perfect competition in both commodities and factor markets.Producers,
consumers, and traders of commodity X and commodity Y in both nations are each too small to affect the price of these commodities. Perfect competition means that all producers, consumers, and owners of factors of production have perfect knowledge of commodity prices and factor earnings in all parts of the nation and in all industries.
• Perfect internal factor mobility but no international factor mobility. Labor
and capital are free to move, and indeed do move quickly, from areas and industries of lower earnings to areas and industries of higher earnings until earnings for the same type of labor and capital are the same in all areas, uses, and industries of the nation. On the other hand, there is zero international factor mobility (i.e., no mobility of factors among nations), so that international differences in factor earnings would persist indefinitely in the absence of international trade.
• No transportation costs, tariffs, or other obstructions to the free flow of
proceed only until relativecommodity prices differed by no more than the costs of transportation and the tariff on each unit of the commodity traded. • All resources are fully employed in both nations.
• International trade between the two nations is balanced. The total value of
each nation’s exports equals the total value of the nation’s imports.
2.2 Previous Studies
Table 2.3 Previous Studies
No Title Model Conclusion
1
Kusuma, Dimas. (2010).
Analysis The Impact of Exchange Rate Fluctuation
Toward Export And Imports Performance In
The OIC Member
Countries. “Economic and
Trade Integration Among OIC Member Countries:
Opportunities and Challenges”.
VAR/VECM
The conclusion shows that there is evidence of long-run co-integrating relationship between variables in all countries, except for Malaysia. And majority of the observed countries, except Malaysia, seem to have no problem with the existence of exchange rate fluctuation.
2
Ng Yuen-Ling and Wai-Mun, Har and Geoi-Mei,
Tan. (2008). Real Exchange Rate and Trade
Balance Relationship: An Empirical Study on
Malaysia. International
Journal of Business and Management Vol. 3, No. 8.
VECM
The conclusion shows that long run relationship exists between trade balance and exchange rate.
3
Genc, ElifGuneren and Artar, OksanKibritci.
(2014). The Effect of Exchange Rates On Export
And Imports of Emerging
Countries. European
Scientific Journal edition vol.10, No.13.
Panel Model
The conclusions shows there is co- integrated relationship between effective exchange rates and exports-imports of emerging countries in the long run.
4
Rahman, Mohammad Zillur. (2011). Existence of
Export-Import Co integration: A Study on Indonesia and Malaysia.
International Business Research Vol. 4, No. 3;
July 2011
VAR
5
Rahutami, Angelina Ika. (2011). Real Exchange
Rate Volatility and n School of Management R
adboud University.
ARCH and GARCH
The estimation result shows that the increasing of term of trade will induce the exports value. The income also has positively significant effect on imports value, but the real exchange rate has a negative significant effect.
6
Irandoust, Manuchehr and Ericsson, Johan. (2002).
Are Imports And Exports Cointegrated? An International Comparison.
Metroeconomica 55:1.
Cross-section
The results indicate that there exists a long-run steady-state relationship between imports and exports for most countries in the sample. The policy implications of our findings are that the countries are not in violation of their international budget constraints and, more importantly, there is no productivity gap between the domestic economy and the rest of the world, implying a lack of permanent technological shocks to the domestic economy.
7
Ramli, Norimah and M. Podivinsky, Jan.. (2010).
The effects of exchange rate volatility on exports:
Some new evidence for regional ASEAN countries.
ECM
The conclusion are shows that the real bilateral exchange rate volatility has a significant impact on exports for all the countries considered in the sample, and the impact overall is negative except for Indonesia.
8
Husein, Jamal. (2014). Are Exports and Imports
The findings of co integration between exports and imports for Iran, Israel, Jordan, and Tunisia indicate that these countries are not in violation of their international budget constraint.
9
Konya, Laszlo and Singh, Jai Pal. 2008. Are Indian
Exports And Imports
Cointegrated?. Applied
Econometrics and
International Development Vol- 8-2 (2008).
effective to contain the trade imbalance.
10
Perera, Nelson and Varma, Reetu. (2008). An Empirical Analysis of Sustainability of Trade Deficit: Evidence From Sri
Lanka. International
The empirical findings suggest that the current account (exports and imports) of Sri Lanka is not sustainable (and this violates its intertemporal budget constraint) in the long-run.
Source: References
The previous studies provide the information which is important for the researcher to enrich the empirical study. Based on the previous studies conducting by researcher, most of the literatures are using VAR/VECM analysis, to see the interaction between exchange rate and monetary policies. Due to the same variables, time release, or the research area so the previous studies are used as the comparison and as a resource to conducting this research.
2.3 Theoretical Framework 2.1.1 Trade Balance
of C + I + G + (X – M), where C, I and G represent consumer spending, capital investment and government spending, respectively.
The standart equation of national growth invole the exports minus imports or net exports (X – M). If the countries exports are greater rather than imports, it is called trade surplus. Conversely, if the countries imports are greater than exports, it is called trade deficits or informally called “trade gap”. The positive trade balance contribute to the economic growth. Higher exports mean that higher outputs from domestic producers, it is affect the high needs of labour in order to maintain the high quality product. The high exports also represent an inflow of funds to the country, which affect the costomers expenditures and contributes to economic growth.
Coversely, an unsustainable trade deficit indicates a violation of international budget constraints over time (Babatunde, 2014). The impact of long-term deficits is that the domestic interest will be increase which affect to the high needs of international debt. The final impact of course will affect the welfare of people in the country. In that case, the long-run stability of two variables are vital to economy. The occurance of cointegration relationship between exports and imports suggest that the trade imbalances are only short term and will sustainable in the long term and confirm the existance of an effective macroeconomic policy.
2.1.2 The Effect of Exchange Rate
exchange rate has the influence to the trade balance performance (surplus or deficits), while it is impact to the exchange rate volatility. The theoritical literature of Mundell-Fleming model states that if the domestic currency goes down, it will stimulate the exports and makes the imports more expesive. Coversely, a strong domestic currency will rise up the exports and makes the imports more cheaper.
2.4 Hypotesis
Based on theoritical background, previous research, and research framework. This research develops these following hypotesis:
(a). H1: There is co-integration between trade balance variables, namely exports and imports.
(b). H2: There is bidirectional relationships between exchange rate and trade balance variables.
Exchange Rate
Exports
Imports
CHAPTER III
RESEARCH METHODOLOGY
3.1 Research’s Object
The research object is taking the macroeconomic perspective and focused on selected ASEAN-5 countries. This research is conducted to describe how the trade balance performance of selected ASEAN-5 countries and exchange rate fluctuations interrect each orther. The data spaning from 2000;M1 until 2015;M12 from selected ASEAN-5 countries i.e. Indonesia, Malaysia, Singpore, Thailand, and Philippine as secondary data collection.
3.1 Data Types
Quantitative research method are employed to capture the aim of this research. Quantitative researchs are best describe to analyze of macroeconomic fenomena, using the numbers and mathematical approaches as evidence to describe the current economic issues. All data are expressed in time series form and then analyze and utilized by unit root and co-integration tests. The data are monthly data collection of 3 variables (export, import, and exchange rate) from January 2000 to December 2015.
Financial Statistic and other sources that provide the time series variables of selected ASEAN-5 countries.
3.2 Techniqueof Data Collection
Since the data are secondary data, which means can be obtained from indirect sources of documentation in several sites, books, and public articles that provided. However, wrong data colletion which can be error in implementing the research would directly impact the result of research later on. So, this stage could be very crucial for the research.
3.3 Operational Definition of Researched Variables
Table 3.1 Observed Variables
No Variables Explanation Source Unit
1 EXR The number of units another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency.
occur on a large scale between nations that have fewer restrictions on trade, such as tariffs or subsidies.
3. Import (IMP) is a good or service brought into one country from another. Along with exports, imports form the backbone of international trade. The higher the value of imports entering a country, compared to the value of exports, the more negative that country's balance of trade becomes.
3.4 Model Analysis
To investigate more on wheter the selected ASEAN-5 countries are free from trade imbalances and investigate the effect of it as the exchange rate gets fluctuating; so VAR-based approaches are used.
The analysis used on this model is Vector Autoregression (VAR) model as an attempt to examine the dynamic relationships between two (or more) variables. A time series data are needed to investigate the phenomena using VAR approach. According to Enders (1995), an n-equation VAR is an n-variable linear system
in which each variable is in turn explained by its own lagged values and past
values of the remaining n-1 variables.
dynamic of variables. VAR approach is enabled to do need to differentiate between exsogen and endogen variables, and its ability to capture dynamic movement as one or more variable are reached in respond a movement from other variable (Sim, 1980).
As the variables are treated as endogenous variables, hence we may write as the equation below.
�� =� + ��− + ��− + ��− +�
�� =� + ��− + ��− + ��− +�
��= � + ��− + ��− + ��− +�
The expanse definition of the equation can be writen in matrixes form as below.
In addition, if the variable have unit roots, then we can exploit that there may exist co-movement in their behavior and possibilities that they will trend together toward a long run equilibrium state. Then, using the greater representation theorem, we may posit the following testing relationships that constitute a VEC model for exchange rate fluctuation.
1. Unit Root Test – Augmented Dickey Fuller and Phillips-Perron Test
2. Correlation Matrix – Johansen-Juselius Cointegration Test 3. Vector Autoregression-based analysis (VAR/VECM) 4. Impulse Response Function
5. Variance Decomposition Test
The further analysis techniques will be explained in the following chapter.
3.5.1 Unit Root Test
Unit root test supposed to figure out the stationary of research data (Thomas, 1997). This undergraduate thesis using the commonly used tool which called Augmented Dickey Fuller (ADF) and Phillips Perron (PP) test.
The ADF test defines the existence of unit root in the research data. The estimation procedure will takes place in the form;
∆ � =� +� �+� �− +��� ∆ �− �
�= +��
Phillips perron testassess the null hypothesis of a unit root in a univariate time series y. All tests use the model;
� =�+��+� �− +��
Where ∆ � denotes lag difference under variable consideration. M is the number of lags and ��is the error term. From the equation above comes with this following hypothesis;
=� = 0
The first equation show that the unit roots does exist and the data is not stasioner. The second equation means that there is no unit roots so than the data is stationer. If null hypothesis cannot be rejected and the data are not stationer in the level, therefore we need to go through higher order differentiating process to archieve stationer.
3.5.2 Co-integration Test
For the co-integration test we employ the VAR-based approach of Johansen (1988) and Johansen and Juselius (JJ, 1990). The latter develop two test statistic to determine the number of co-integrating vector i.e. trace statistic and maximum eighen value test. Start with a VAR representation of the variables, in this case what we think is the economic system we would like to investigate. We have dimensional process, integrated of order d, {x} t∼I (d), with the VAR representation,
��( )��= � +Ψ �+��
relations and therefore can better reflect the relationship among the variables.In a traditional VAR analysis, Luthepohl and Reimers (1992) showed that impulse-responses and variance decomposition analysis can be used to obtain information concerning the interactions among variables.
3.5.3 Vector Auto Regression / Vector Error Correction Model
a. Vector Auto Regression (VAR) is an econometric model used to capture the evolution and the interdependencies between multiple time series. All the variables in VAR are treated symmetrically by involving each variable an equation explaining its evolution based on its own lags and the lags of all the other variables in the model. Econometric model that builds upon the relationship between the variable that refers to the model and used to see the causal relationships between variables
General model, VAR with lag1;
� =� � +� � �− +� � �− +��
� =� �+� � �− +� � �− +��
in many cases better than those obtained from the more complex simultaneous-equation models. (Gujarati, Damodar N. 2004)
b. Vector Error Correction Model (VECM) is restricted VAR used for nonstationary data series that are known to be cointegrated. The VECM restricting the long-run relationship among endogenous variables and changing them into their cointegration relationship, while allowing their short-run adjustment dynamics. The short-run adjustments correcting the movement of long-run’s deviation equilibrium gradually that is called cointegration term or known as error term. (Basuki and Yuliadi, 2015) The process of VAR/VECM method will be shown below;
Figure 3.1
(Natural Log) Data Exploration
3.5.4 Impulse Response Function
Impulse Response Function (IRF) estimation is needed to determine an endogenous variable response to shocks specific variables. IRF also used to see the shockscaused by the other variables and how long these effects occur (Nugroho, 2009). Through IRF, the response of an independent change of one standard deviation can be reviewed. IRF explore the impact of interference by one standard error as an innovation on an endogenous variable against other endogenous variable. An inovation on a variable, will directly impact the variable in question, and then proceed to all other endogenous variables through the dynamic structure of the VAR (Nugroho, 2009).
3.5.5 Variance Decomposition Test
CHAPTER IV RESEARCH FINDINGS
4.1 Researched Variables Overview
This sub-chapter will introduce the variables used in this research. This research has three variables from five countries which are; Export (EXPT), Import (IMPT), and nominal exchange rate of the countries (EXR). Total varibles used in this research are fiveteen variables which taken monthly from year 2005 to 2015. The data of the countries will be processed one by one, and then compared between countries to see how strong the economics of the selected ASEAN-5 countries are.
4.1.1 Country’s Trade Balance Overview
Figure 4.1 Singapore’s trade balance
Figure 4.2 Malaysia’s trade balance
dimension stones such as granite as well as marble blocks and slabs. (http://www.tradingeconomics.com/malaysia/balance-of-trade)
Figure 4.3 Thailand trade balance
Figure 4.4 Indonesia’s trade balance
Since the 2000’s Indonesia has been recording consistent trade surpluses due to robust exports growth. However, from due to the shock on 2008, the value of export and import falling as the other countries does, yet the countries sustain the economic turmoil. In 2012 to 2014 the country started recording trade deficits, as exports shrank due to slowdown in the global economy and fall in commodity prices. In 2015, trade balance swing again to surplus due to almost 20 percent fall in imports. In recent years, the biggest trade deficits were recorded with China, Thailand, Japan, Germany and South Korea. Indonesia records trade surpluses mainly with India, United States, and Malaysia.
(http://www.tradingeconomics.com/indonesia/balance-of-trade).
international market. This situation illustrates that with the higher import content for export products will reducing a value-added export products nationwide.
Figure 4.5 Philippine trade balance
Philippine has suffer the trade deficits over a years. Philippine has been running annual trade deficits due to high imports of raw materials and intermediate goods. The trade balance should worsen due to the rapid rise in imports stimulated both by household consumption and the input needs for industry. Recent data showed export fluctuated extreamly after the shock held in 2008. The weak level of the currency has done little to boost exports, which should appear more affordable to foreigners, raising concerns about underlying global demand. (https://psa.gov.ph/business/foreign-trade)
From the trade balance overview of ASEAN-5 countries, all of those countries showing the same pattern of exports and imports performance. From 2005 until 2007 the trade balance movements showing an increasing value of exports imports, then fall in 2008 and 2009. This pattern caused by the external shocks came from United State economic caused by sub-prime morgate.
4.2 Research Findings and Discussion
This research use the econometical approaches to analyze the trade balance performance of ASEAN-5 countries and the interraction towards exchange rate fluctuation. In order to get the best result, we follow the standard procedure of time series analyses by following these procedures:
1. Unit Root Test – Augmented Dickey Fuller and Phillips-Perron Test
2. Correlation Matrix – Johansen-Juselius Cointegration Test 3. Vector Auto Regression-based analysis (VAR/VECM) 4. Impulse Response Function
5. Variance Decomposition Test
4.1.1 Unit Root Test
data processing program using Eviews 7 program, unit root test results are shown in the table below.
Table 4.1
Unit Root Test - Augmented Dickey Fuller (ADF-test)
Test ADF Test
Table 4.1 suggest that all variables, exchange rates and trade balance of five countries are not stationary in the level. Therefore, the variables should be transformed into first different, and seemingly all of variables are stationary at first different. The defined equation of the variables are presented below;
��� = � +� ����− +� �����− +��
in first different. � �����− is represented as first different of variable import. As the all variables are in the first different, the relationship among the variables exchange rate, export, and import should be conducted in VECM estimation on their first different.
Before we go through the next step of analysis, VECM estimation procedure need to be tested into leg length criteria. Leg length estimation is conducted to decrease the probability of autocorrelation problem in VAR stability analysis. VECM estimation presuppose the data is in stationary condition. As the data is seemingly stationary in first different, hopefully can increase the validity of model output. So, hopefully this research has a high validity conclusion.
Lag length test result in VAR by entering Akaike Information Criterion (AIC) showing the optimal lag length of each countries are;
Table 4.2
Optimal Lag Length Criteria Countries Optimal Lag
Length
Singapore 2
Malaysia 2
Thailand 2
Indonesia 2
Philippine 1
4.1.2 Correlation Matrix – Johansen Juselius Cointegration Test
Cointegration test is very crucial in this research. In order to examine which method is used in the next step estimation, this cointegration test is needed to be conducted. Cointegration test is conducted to see the stationarity of variables. The integrating variables define similar stochastic trend and long-term similar movement.Cointegration test examined by the Johansen Juselius Cointegration test. In order to find out the number of cointegrating vectors, Trace statistic and Maximal Eigen value tests were used. This research examined all of five countries, in which the result would be different from each countries. The null hypothesis of no integration is rejected at the 0.05 significance. Findings will be shown in table below;
Table 4.3 Cointegration Test
H 0 Trace Test
Singapore Malaysia Thailand Indonesia Philippine r = 0 153.49** 78.85** 146.72** 146.26** 213.07** r < 1 76.66** 37.42** 58.38** 78.63** 114.30** r < 2 24.61** 8.48** 25.96** 29.50** 43.90**
Maximum Eigenvalue Test
r = 0 76.82** 41.42** 88.34** 67.63** 98.76** r < 1 52.04** 28.94** 32.42** 49.12** 70.39** r < 2 24.61** 8.48** 25.96** 29.50** 43.90**
Note: ** denotes significant at 5%
According to above co-integration test, the trace test and maximum eigenvalue test showed there is a co-integration of all variables at α = 5% in each countries. In other words, the export and import in each countries are co-integrated having tested by Johansen-juselius test. Therefore, all countries suggest that they are not in violation of their international budget constraints and trade imbalances are only a short-term phenomenon that in the long run are sustainable. Even Philippine who has deficits trade balance among the others has a significant result according to the test. In term of trade policy, seemingly all of the sample countries are showing a “good policy” in managing their trade balance stability and moving away from external shocks or the existence of a productivity gap.
The next cointegration test can be seen from VECM estimation. The coefficient (cointEq1) showed the speed of adjustment of disequilibrium in the period of study. In this case, the trade balance variables influence the exchange rate. this test is conducted to choose the method we use in this research. It is VAR or VECM analysis.
Table 4.4 Cointegration Test 2
CointEq1 Singapore Malaysia Thailand Indonesia Philippine EXR [0.37156] [ 0.99421] [-1.87085] [-2.42189]* [-0.20284] EXPT [-3.16701]* [-3.71215]* [-3.99557]* [ 1.30068] [ 1.52899] IMPT [-3.08932]* [-1.27068] [-0.28396] [ 2.81287]* [-3.99883]*
Table 4.4 showed the coefficient (CointEq1) of VECM estimation. According to the result, Indonesia is the only one country who is significant of their exchange rate variable which is act as exogenous variable. This mean that Indonesia trade balance variables are corrected by Error Correction Term (ECT)
in the short term so can significantly explain the exchange rate in long term condition. Because of the significant result, Indonesia using VECM method. The other four countries are unsignificant of their coefficient, therefore VAR method is used.
Table 4.5
Import (IMPT) Export
(EXPT) Import (IMPT)
Export (EXPT) Import
(IMPT) F-statistic in () (0.57990) <== (5.65933) Probability in [ ]
[0.5615] [0.0044]
Table 4.5 shows the result of granger causality test. According to the result of granger causality test, those five countries have a different result depent on their economic condition. In regard to above findings, some assumption are explained below:
• Singapore has a very significant result on their exchange rate variable
exchange rate system which has a limited border line for exchange rate to fluctuate. The government of Singapore need to carefully manage their exchange rate volatility, because Singapore is the small and open economy country. Means that, the exchange rate is the most effective policy intrument for maintaining their domestic price stable. (Monetary Authority of Singapore, 2011)
• Malaysia otherwise, has let their trade balance variables influence their
exchange rate, with only 0.03 and 0.04 significant level. Thus, their exchange rate variable only effect import. As a free floating exchange rate system user, Malaysian exchange rate is determined by supply and demand for the currency without government interventions, while the supply and demand for it is currency are determined by trading.
Accroding to Jarita Duasa (2009), on her paper found that the degree of Exchange Rate Pass-Through (ERPT) on both exports and imports variables are low or incomplete. Then she suggest that the monetary policy is not very sensitive to exchange rate fluctuations. On the other hand, the use of exchange rate adjustment to improve the trade balance is less effective with the low ERPT.
• Thailand is the export-oriented country which adopt managed floating
massive export caused a slowdown in Thailand’s export. The real
appreciation was due to the steady rise in the domestic price level
relative to the price levels of major trading partners. The result also
showing the bivariate causality between Thailand’s trade balance
variables. We assume that because of reduction of important raw input
material made Thailand import it from neighbor countries, that is Japan
who has the largest source of imported good for Thailand. Thailand has
been dependent on imports of cheaper capital goods from Japan since then. • The result of granger causality test for Indonesia is showed that only import
that affect export of Indonesia’s with 0.040 significant level. Iman (2005) state that the supply shifter is more important than the demand shifter in explaining Indonesia’s export in the pre-crisis period has a broader consequence on modelling of export and on policy decisions. Thus, devaluation policy is not very effective. And he found that import is more sensitive to exchange rate, therefore the improvement of trade balance performance will be mainly come from import.
• Philippine result from granger causality test is that their exchange rate
up the nominal interest rate relative to inflation. The findings also show that their trade balance has a bivariate causality between eachother.
4.1.3 Vector Error Correction Model (VECM)
In order to catch the short-term and long-term dynamics model, Vector Error Correction Model is used. The cointegration test exemined to see the similarity stochastic trend and long-term similiar movement of the variables. According to the result of cointegration test, Indonesia has their variables co-integrated, therefore VEC model is used. The short-term VECM result will be interpratated in table below;
Table 4.6
Short-term VECM Estimation Indonesia
Variables Coefficient t-Statistic CointEq1 -0.012239 -2.42189 D(EXR(-1)) 0.195410 2.2127 D(EXR(-2)) -0.194819 -2.20655
Tables 4.6 shows the result of short-term estimation for Indonesia. in this estimation, the variable of exchange rate is become exogenous variable that affected by the trade balance. Those variables are significant at alpha 5%. The estimation result will be explain below;
amount 0.194819 in the present year. The variable cointEq1 which showed the speed of adjustments were significant with negative signs indicates that about 1.2% of disequilibrium is corrected each month to bring the long-term equilibrium between variables.
In the short-run VECM estimation above, the trade balance variables insignificantly affect the exchange rate variable. Indonesia’s exchange rate variable are affected by its own variable. This findings explained that fiscal policy is more effective in keeping the exchange rate stable. The findings also prove the condition that in the short-term, government has a good policy in maintain their exchange rate fluctuation toward trade activities.
VEC Model also estimate the long-term dynamic movement of variables. VEC model estimation result will be shown below;
Table 4.7 Long-term VECM Estimation Indonesia
Variables Coefficient t-Statistic EXPT(-1) 7.895563 3.60424 IMPT(-1) -7.28879 -3.85874
C -31112.02
In the tabel 4.7 above showing the long-term analysis. The findings of Indonesia long-term analysis will be explained below.
negatively significant effect of imports means that, if there is an increasing on imports it will decrease the exchange rate variable at the amount 7.288793%.
Indonesia’s nominal exchange rate has significantly affected by trade balance in long-term estimation. In the previous description of countries trade balance performance, Indonesia having a surplus in their trade balance, in other words their exports are greater than imports. They could sell the product with a higher net income rather than it is spending. In general, this means that Indonesia’s economy are relatively stronger than its trading partners. As a result, their currencies tend to be strengthen againts its trading partner’s countries. If Indonesia experienced a surplus trade balance continously, in the long-term it will makes the exchange rate tend to be strengthen.
4.1.4 Vector Autoregression (VAR)
VAR model is a model that estimate the variables with quadratic model estimation. In VAR model, the variables will be predicted by itself (lag), and also information from the movement of endegenous variables. The result of VAR estimation will be explained in coefficient form;
1. Singapore
• Exchange Rate (EXR)
2.3925695e-06*D(IMPT(-1)) + 1.1615035e-06*D(IMPT(-2)) - 2.019092e-06*D(IMPT(-3)) - 0.0012413539
From the above estimation, the endogenous variables can predict the movement of exchange rate 16.7% (R-squared). The value of coefficient in the first lag EXR and EXPT significantly influence the EXR. For IMPT unsignificantly influence EXR in all lags.
• Exports (EXPT)
D(EXPT) = - 15257.154*D(EXR(-1)) - 16027.190*D(EXR(-2)) - 17761.637*D(EXR(-3)) - 0.63507956*D(EXPT(-1)) - 0.05499913*D(EXPT(-2)) + 0.18893342*D(EXPT(-3)) + 0.12406263*D(IMPT(-1)) - 0.21418097*D(IMPT(-2)) - 0.077379238*D(IMPT(-3)) + 29.539394
From the above estimation, the endogenous variables can predict the movement of exports 32.7% (R-squared). The value of coefficient in the first lag EXPT significantly influence the EXPT, while for EXR and IMPT insignificantly influence EXPT in all lags. • Imports (IMPT)
