Dynamics Of Indonesia's International Trade a VAR Approach

The main purpose of this study is to determine the dynamics between real effective exchange rate and macroeconomics variables in Indonesia. This research used VAR method as its approach, which has impulse response and variance decomposition to obtain the variables dynamics. Results from Augmented Dickey-Fuller and Phillips-Perron unit root test confirmed that all variables are stationer in level; hence, the VAR method that being employed is VAR in level. The empirical evidence provided here suggests that the real effective exchange rate is important in explaining the movement of export, import and inflation. The depreciation of real effective exchange rate does not necessarily increase exports and decrease imports, especially in longer horizon. Export itself is important in the movement of import, and it has positive correlation as the relationship between them is complement. Since some of the SMEs are engaged in international trade, it is essential for them to reduce the exchange rate exposure.