Trade openness, exchange rate, gross domestic investment, and growth in Indonesia
This study examines the relationships among economic growth, domestic investment, real exchange rate, and trade openness in Indonesia. We carried out the unit root test, the Johansen co-integration test and then estimated the VEC model. The results suggest that there exists a long-run relationshi...
| Main Authors: | , |
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| Format: | Conference or Workshop Item |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/24473/ http://irep.iium.edu.my/24473/ http://irep.iium.edu.my/24473/1/Trade_Openness%2C_Exchange_Rate%2C_Gross-.pdf |
| Summary: | This study examines the relationships among economic growth, domestic investment, real
exchange rate, and trade openness in Indonesia. We carried out the unit root test, the
Johansen co-integration test and then estimated the VEC model. The results suggest that
there exists a long-run relationship among the variables. All the estimated coefficients of
the long run equation have the correct positive signs and significant at least at 5 percent
level. Specifically, a one percent increase in trade openness leads to about 26.5 percent
increase in Indonesian real GDP in the long-run; a one percent increase in domestic
investment will spur GDP by 1.8 percent, and a one percent depreciation of rupiah
promotes GDP by about 6.4 percent in the long-run. The results of Granger causality test
using VECM suggest that all the variables cause real GDP in the short-run. Both the trade
openness and gross domestic investment cause growth unidirectionally in short-run,
except for real exchange rate. The evidence suggests that trade openness, GDI and
exchange rate are important determinants of economic growth. And therefore policy
makers should seriously take these variables into account in their policy construct in
order to sustain economic growth in Indonesia. Specifically, Indonesia should promote
foreign trade, improve the domestic investment climate, and maintain exchange rate
stability.
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