STRUCTURAL BREAKS AND BILATERAL EXCHANGE RATE PASS-THROUGH: AN EMPIRICAL CASE OF INDONESIA–UNITED STATES
Abstract: This study estimates
the exchange rate pass-through into domestic prices in Indonesia in the
two-stage approach. The study focuses on first step pass-through, i.e. ERPT
into import prices and second step pass-through, i.e. into consumer prices,
using co integration and error-correction mechanism (ECM) model. This research
uses a Zivot-Andrews technique to test for structural breaks and Gregory-Hansen
models to tests. The results show that the long run ERPT to import prices with
structural breaks is relatively low compared to the results without them. The
absolute error correction term values resulted from co integration are decreased
and the error-correction models need period lagged longer than one-period if the
estimation included the estimated structural breaks. The main finding is that
allowing for possible breaks around the crises in Indonesia, and a shift of the
exchange rate management from managed to free floating in 1997 helps to restore
a long run cointegration relationship estimation.
Author: Arintoko
Journal Code: jpmanajemengg110017
