Template-type: ReDIF-Paper 1.0
Author-Name: Moh. Khusaini
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Title: The Role of Economic Fundamentals in Explaining Indonesian Currency Crisis
Abstract:This paper examines the determinants of currency crisis, particularly the role of
 economic fundamentals in explaining the currency crisis in Indonesia in the 1990’s. This 
 study has an objective: to analyze the role of the ratio of M2 to reserves, the ratio of 
 banks’ claims on the private sector to Gross Domestic Product, the ratio of current 
 account deficit to Gross Domestic Product, the growth rate of Gross Domestic Product,
 reserves to import ratio, exchange rate system in explaining the currency crisis in 
 Indonesia during period of observation. Using time series quarterly data for Indonesia 
 spanning the period of quarter one 1990 to quarter four 2001, this study employs a simple 
 regression model modified from the previous research, in which the change in the rupiah 
 exchange rate is a linear function of the economic variables that represent the economic 
 fundamentals of Indonesian economy. By using the Statistical Package for Social Science 
 (SPSS), the results of this study indicate that selected variables of economic fundamentals
 simultaneously contribute to the currency crisis. The value of coefficient determination 
 (R2) of 0.959 indicates “the goodness of fit” toward group of data, and implies that 
 95.9 % of the variation in the rupiah exchange rate during the period of observation can 
 be explained by the chosen variables. The linkage between economic fundamentals and the 
 currency crisis is also supported by regression model, in which the increase in the ratio
 of banks’ claim on private sector to GDP and the increase in the ratio of current account
 deficit to GDP led to the depreciation of the rupiah exchange rate during the observation.
 Similarly, the growth rate of GDP has had a positive impact on the rupiah exchange rate,
 which means that growth rate of GDP led to an appreciation of rupiah exchange rate. The
 abandonment of the pegged exchange rate system resulted in the depreciation of the rupiah
 exchange rate. For this reason, it is reasonable to argue that there is a linkage between 
 the weaknesses of economic fundamentals and currency crisis during observation. However, 
 the ratio of M2 to reserves is statistically insignificant.
Keywords: Indonesia, currency, GDP
Length: 49 pages
Creation-Date: 2002-04-01
File-URL:http://icepp.gsu.edu/files/2015/03/ispwp0219.pdf
File-Format:application/pdf
Handle: RePEc:ays:ispwps:paper0219