The Short-Run and Long-Run Effects of Central Bank Rate on Exchange Rate Volatility in Indonesia

This research measures the short and long-run effects of central bank policy rate on the volatility of the exchange rate in Indonesia using the quarterly data from Q1 1992 to Q4 2019. The process involves applying an Autoregressive Distribution Lag estimation to investigate the effect between the variables. Several results were obtained from the study and the first showed the adjustment time for exchange rate volatility to achieve long-run equilibrium was 1.77 quarters to 2.26 quarters using the ARDL estimation, second, a decrease in the Central Bank rate was found to have reduced the exchange rate volatility in the short-run and long-run significantly. Our findings are robust since we applied Full Modified Ordinary Least Square FMOLS estimation for all five models, we still found that in the long-run central bank policy rate had a significant positive effect of volatility Indonesia Rupiah against five foreign exchange rates. Therefore, it was suggested that the policymakers need to keep the Central Bank interest rate low and stable to ensure the Rupiah exchange rate stability