Determinant Factors of Real Exchange Rates: The Behavioral Equilibrium Exchange Rates Model (The Beer Model)

Abstract

The objectives of the research were: ( l) to know the fundamental factor of macroeconomic which determine real exchange rates; and to know the effect of the global economic crisis of the 2007-2008 on real exchange rates in Indonesia during the period of 2004-2008. and (2) to examine the stability of real exchange rates model in Indonesia during the period of 2004. 1-2008.4. By using the econometric approach (the time series analysis), the study found that real exchange rates in Indonesia during the period of 2004-2008 were determined by the fundamental factors of macroeconomic as follows: (a) real exchange rates at the one quarterly lag (positive correlation: It implies that an increase of real exchange rates at the one quarterly lag could be perceived by the next quarterly as well, (b) real interest rates differentials (positive correlation, i.e. the degree of openness affected real exchange rates), (c) net foreign assets (negative correlation, i.e. the increase of the net foreign assets caused appreciation of rupiah against the USA dollar), and (d) the global economic crisis during, the period of 2007-2008 (positive correlation, i.e. the crisis tended to depreciate real exchange rates). Employing the CUSUMSQ Test (the Cumulative Sum of Squares of Recursive Residuals) for the stability of real exchange rates model, the study provided evidence which supported the idea that the .function (model) of real exchange rates was stable (the parameters of the regression during the period of 2004-2008 significantly remain unchanged)