The nexus between Indonesia’s exchange rate and the world crude palm oil price

Abstract

Objective: International trade plays a major role in increasing the output of each country. Crude Palm Oil (CPO) is one of Indonesia’s major export commodities. Facts show over the past two decades, CPO has become a fast-growing product. However, there are obstacles from one of Indonesia’s CPO importers, namely the European Union. The aim of this study is to explore the nexus between the exchange rate and the world price of CPOs.

Research Design & Methods: This study uses both the exchange rate of Indonesia and the price data of the world CPO from 1981-2017 as secondary. Granger Causality was used to explain the nexus between the exchange rate and the world price of CPOs.

Findings: The results of the Granger Causality showed there was no causality between the exchange rate and the price of the world CPO. The lack of causality between the two variables suggests the trade balance’s position is stronger and able to explain the exchange rate.

Contribution & Value Added: This study indicated that the IDR exchange rate is more sensitive to trade balance rather than the world CPO price. Moreover, It is necessary to refined palm oil products to increase the contribution of the non-oil sector in Indonesia. In addition, the Indonesian government needs to be aware of the European Union’s raised barriers to world trade. It means that Indonesia can make a positive campaign about the ad-vantages of palm oil production.

Keywords

International Trade, Crude Palm Oil, Exchange Rate, World CPO Price, Granger Causality

Author Biography

Cheng-Wen Lee

Professor in International Business (Chung Yuan Christian University, Taiwan), Ph.D. in Commerce (Waseda University, Japan). Her research interest in the areas of environmental or technological innovation and transfer, multinational or global strategies (e.g., M & A, strategic alliance, joint venture), and knowledge management.

Andrian Dolfriandra Huruta

Ph.D. student in the Ph.D. Program in Business (Chung Yuan Christian University, Taiwan). His research interest in the areas of macroeconomic policies, international trade, and applied econometrics.

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