Analysis of the Influence of National Income, Interest Rates, and Inflation on the Nominal Exchange Rate: An Approach Using Cointegration and Error Correction Model (ECM)

Abstract

The objective of this research is to evaluate the impact of interest rates, national income, and inflation on the rupiah-to-dollar exchange rate, both in the long term and short term. The analysis is based on secondary data covering the period from 1989 to 2024 (36 years). The method applied in this study is multiple linear regression using the Ordinary Least Squares (OLS) approach. In addition, the research employs cointegration and the Error Correction Model (ECM), preceded by several other statistical tests. The results of the study using Johansen’s cointegration test show that there is a long-term equilibrium relationship between all independent variables (inflation, national income, and interest rate) and the dependent variable (exchange rate). This finding is supported by a trace statistic value of 102.1727, which significantly exceeds the critical value at the 5% significance level, namely 47.85613. Moreover, the Maximum Eigenvalue Statistic is 36.7908, which is higher than the 5% critical value of 27.584434. Furthermore, the results from the ECM test indicate that only inflation, the residual term, and the interest rate have a statistically significant impact, while national income does not show significance. These findings suggest that inflation and interest rates have a short-term relationship with the exchange rate, as evidenced by the p-values of the respective variables being below the 5% significance level (0.05). In addition, the residual coefficient in the ECM test result is recorded at -0.732447, indicating that the error correction term (ECT) is significant and that approximately 73.24% of the disequilibrium is corrected in the following period