US–Indonesia trade at commodity level and the role of the exchange rate

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Abstract:

Previous studies that assessed the impact of currency depreciation on inpayments and outpayments of Indonesia with her major trading partners did not find much significant results, especially in the trade with the United States. We wonder whether insignificant link between the real rupiah-dollar rate and Indonesia’s inpayments and outpayments with the United States is due to aggregation bias. To answer this question, we disaggregate the trade flows between the two countries by commodity and consider the sensitivity of inpayments of 108 US exporting industries and outpayments of 32 US importing industries from Indonesia. We find that most industries respond to exchange rate changes in the short run. In the long run, however, 32 inpayments schedule and 17 outpayments schedule are significantly affected. A 1% real depreciation of the dollar was found to improve US trade balance by 1.8%.

Keywords: F30; F31; Indonesia; US; commodity trade; exchange rate

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.896985

Affiliations: 1: The Center for Research on International Economics and Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI, 53201, USA 2: Department of Economics, Pennsylvania State University, Mont Alto, PA, 17237, USA

Publication date: June 23, 2014

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