Analisa Exchange Rate Overshooting Melalui Pendekatan Error Correction Model

Abstract

The main purpose of this study is to analyze the movement of Indonesian Rupiah
against United States Dollar and its determinants. Frankel-Dornsbusch Overshooting
is used as theoretical basis. It is stated that when an exchange rate is depreciated
proportionately exceeding money growth, it can be said that the exchange rate is
overshoot. In other words, its value is fundamentally undervalued. By using data from
third quarter 1997 through fourth quarter 2004 and using error correction model as
its methodology, it can be concluded that in the short-run, Indonesian rupiah was
over-shooted. Furthermore, I also found that in the long-run Rupiah was converged
to its equilibrium value. These findings indicate the need of policy that can control
the volatility of money growth, especially in the short-run horizon. Capital control is
one of several policies that can be effective to maintain the stability of money growth
and subsequently the exchange rate.
Keywords: Frankel-Dornsbusch Overshooting, Exhange Rate, Money Supply,
Error Correction Model