The Impact of Exchange Rate Volatility on Indonesia’s Exports to the USA: An Application of ARDL Bounds Testing Procedure

This paper investigates the long-run and short-run impacts of exchange rate volatility on Indonesia’s exports of priority commodities to the United States of America over the monthly period 1997-2005. Estimates of cointegration relations are obtained using ARDL bounds testing procedure. Estimates of the short-run dynamics are obtained using an error-correction model. The results show significant positive and negative coefficients among the range of commodities. However, in the long-run, majority of commodities tend to support the traditional view that higher exchange rate of volatility leads to higher cost and to less foreign trade. The net effect of exchange rate uncertainty on production and exports depends on the degree of relative risk aversion of the exporter of various commodities. This ultimately influences the reallocation of resources by participants.