Skip to main navigation menu Skip to main content Skip to site footer

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

DOI:

https://doi.org/10.15678/IER.2019.0503.03

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

PDF

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.


References

  1. Ahmad, N. (2014). Impact of Exchange Rate on Balance of Payment: An Investigation from Pakistan. Research Journal of Finance and Accounting, 5(13), 32-43. https://doi.org/10.4314/afrrev.v5i4.69260
  2. Amano, R. A., & Van Norden, S. (1998). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance, 17(2), 299-316. https://doi.org/10.1016/S0261-5606(98)00004-7
  3. Aprina, H. (2014). The Impact of Crude Palm Oil Price on Rupiah’s Rate. Bulletin of Monetary, Economics and Banking, 16(4), 295-314.
  4. Arango-Thomas, L. E., Arias-Rodríguez, F., & Flórez, L. A. (2008). Trends, fluctuations, and determinants of commodity prices. Borradores de Economía; No. 521, (July).
  5. Asea, P. K., & Corden, W. M. (1994). The Balassa-Samuelson Model: an Overview. Review of International Economics, 2(3), 191-200. https://doi.org/10.1111/j.1467-9396.1994.tb00040.x
  6. Ashfahany, A. E., & Priyatna, M. F. (2015). Analysis of World Crude Palm Oil Prices on the Real Exchange Rate: A Case Study of Indonesia and Malaysia. International Conference on Trends in Business and Economics, 19-23. Retrieved from http://dx.doi.org/10.15242/ICEHM.ED0515510
  7. Aziz, M. I. A., & Applanaidu, S.-D. (2017). Effects of Palm Oil Price on Exchange Rate : A Case Study of Malaysia and Indonesia. Institutions and Economies, 9(4), 71-87. https://doi.org/10.1016/j.ijhydene.2017.03.147
  8. Bodart, V., Candelon, B., & Carpantier, J. F. (2015). Real exchanges rates, commodity prices and structural factors in developing countries. Journal of International Money and Finance, 51, 264-284. https://doi.org/10.1016/j.jimonfin.2014.11.021
  9. Buyung, Syechalad, N., Masbar, R., & Nasir, M. (2017). The Analysis af Factors Affecting CPO Export Price. European Journal of Accounting Auditing and Finance Research, 5(7), 17-29.
  10. Cashin, P., Cespedes, L. F., & Sahay, R. (2004). Commodity currencies and the real exchange rate. Journal of Development Economics, 75(1), 239-268. https://doi.org/10.1016/j.econlet.2008.04.008
  11. Chan, K., Tse, Y., & Williams, M. (2011). The Relationship between Commodity Prices and Currency Exchange Rates. Commodity Prices and Markets, East Asia Seminar on Economics, 20(February), 47-71.
  12. Chen, Y., Rogoff, K. S., & Rossi, B. (2010). Can exchange rate forecast commodity prices? The Quarterly Journal of Economics, 125(3), 1145-1194.
  13. Delle Chiaie, S., Ferrara, L., & Giannone, D. (2017). Common Factors of Commodity Prices. Banque de France Working Paper, 645(September). https://doi.org/10.2139/ssrn.3046410
  14. Dogru, T., Isik, C., & Sirakaya-Turk, E. (2019). The balance of trade and exchange rates: Theory and contemporary evidence from tourism. Tourism Management, 74, 12-23. https://doi.org/10.1016/j.tourman.2019.01.014
  15. Doukas, J., & Lifland, S. (1994). Exchange Rates and the Role of the Trade Balance Account. Managerial Finance, 20(5), 67-78. https://doi.org/10.1108/eb018476
  16. Edwards, S. (1986). Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia. In L. Ahamed (Ed.), Economic Adjustment and Exchange Rates in Developing Countries (pp. 233-266). Retrieved from http://www.nber.org/books/edwa86-1 on September 20, 2019.
  17. Ghosh, J. (2010). Exchange Rates and Trade Balance: Some Aspects of Recent Indian Experience. Economic And Political Weekly, 25(9), 441-445.
  18. Huda, E. N., & Widodo, A. (2017). Determinan Dan Stabilitas Ekspor Crude Palm Oil Indonesia. Ekonomi Dan Bisnis, 20(1), 47-68.
  19. Indonesia Investments. (2017). Palm. Retrieved from Indonesia Investments website: https://www.indonesia-investments.com/business/commodities/palm-oil/item166 on September 20, 2019.
  20. Iqbal, A., Hameed, I., & Devi, K. (2012). Relationship between Exports and Economic Growth of Pakistan. European Journal of Social Sciences, 32(3), 453-460. https://doi.org/10.5539/ijbm.v8n21p108
  21. Kahn, G. A. (1984). Theories of Price Determination. Federal Reserve Bank of Kansas City, (April). Kakkar, V., & Yan, I. K. (2014). Determinants of Real Exchange Rates: An Empirical Investigation. BOFIT Discussion Papers, 1. https://doi.org/10.2139/ssrn.2384500
  22. Kiatmanaroch, T., & Sriboonchitta, S. (2014). Relationship between Exchange Rates, Palm Oil Prices, and Crude Oil Prices: A Vine Copula Based GARCH Approach. Springer International Publishing Switzerland, 399-413. https://doi.org/10.1007/978-3-319-03395-2
  23. Kohlscheen, E., Avalos, F. H., & Schrimpf, A. (2016). When the Walk is not Random: Commodity Prices and Exchange Rates Monetary and Economic Department. 121-158.
  24. Lütkepohl, H. (2005). New Introduction to Multiple Time Series Analysis. Retrieved from http://www.afriheritage.org/TTT/2 New Introduction to Multiple Time Series Analysis.pdf on September 20, 2019.
  25. McKinnon, R. I. (1990). The exchange rate and the trade balance – Insular versus open economies. Open Economies Review, 1, 17-37. https://doi.org/10.1007/BF01886174
  26. Nwosa, P. I. (2017). External Reserves on Economic Growth in Nigeria. Journal of Entrepreneurship, Business and Economics, 5(2), 110-126.
  27. Omolade, A., & Mukolu, O. M. (2018). Monetary policy dynamics and the economic growth of the Sub Sahara Africa (SSA). Journal of Entrepreneurship, Business and Economics, 6(1), 36-58.
  28. Pandya, B. (2016). Impact of Financial Leverage on Market Value Added: Empirical Evidence From India. Journal of Entrepreneurship, Business and Economics, 4(2), 40-58.
  29. Pugel, T. A. (2016). International Economics Sixteenth Edition. McGraw-Hill Education.
  30. Rosadi, D. (2012). Ekonometrika dan Analisis Runtun Waktu Terapan Dengan Eviews. Yogyakarta.
  31. Saiti, B., Ali, A., Abdullah, N., & Sajilan, S. (2014). Palm Oil Price, Exchange Rate, and Stock Market: A Wavelet Analysis on the Malaysian Market. Eurasian Journal of Economics and Finance, 2(1), 13-27.
  32. Sally, N. U. (2016). Sengketa Minyak Sawit Antara Indonesia dan Uni Eropa. Dauliyah Journals, 1(1), 1-11. https://doi.org/10.1186/s40563-016-0062-8
  33. Shiozawa, Y. (2015). International trade theory and exotic algebras. Evolutionary and Institutional Economics Review, 12(1), 177-212. https://doi.org/10.1007/s40844-015-0012-3
  34. Shiozawa, Y. (2017). The New Theory of International Values: An Overview. https://doi.org/10.1007/978-981-10-0191-8
  35. Shiozawa, Y., & Fujimoto, T. (2018). The Nature of International Competition Among Firms. In Industrial Competitiveness and Design Evolution (pp. 43-96). https://doi.org/10.1007/978-4-431-55145-4_2
  36. Sims, C. A. (1980). Macroeconomics and Reality. Journal of Econometric Society, 48(1), 1-48.
  37. The Palm Scribe. (2019). 2018, A Gloomy Year for Indonesian Palm Oil Industry. Retrieved from The Palm Scribe website: https://thepalmscribe.id/2018-a-gloomy-year-for-indonesian-palm-oil-industry/ on September 20, 2019.
  38. The Star. (2019). Good weather expected to bolster Malaysia, Indonesia palm oil output. Retrieved from The Star website: https://www.thestar.com.my/business/business-news/2019/03/05/good-weather-expected-to-bolster-indonesia-malaysia-palm-output on September 20, 2019.
  39. The World Bank. (2018a). Commodity Markets. Retrieved from The World Bank website: https://www.worldbank.org/en/research/commodity-markets#2 on September 20, 2019.
  40. The World Bank. (2018b). Official exchange rate (LCU per US$, period average) – Indonesia. Retrieved from The World Bank website: https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=ID on September 20, 2019.
  41. Winarno, W. W. (2015). Analisis Ekonometrika dan Statistika dengan Eviews (4th ed.). Yogyakarta: UPP STIM YKPN.
  42. Zou, L., Zheng, B., & Li, X. (2017). The Commodity Price and Exchange Rate Dynamics. Theoretical Economics Letters, 7(6), 1770-1793. https://doi.org/10.4236/tel.2017.76120
  43. Zuhroh, I., & Kaluge, D. (2007). Dampak Pertumbuhan Nilai Tukar Riil Terhadap Pertumbuhan Neraca Perdagangan Indonesia (Suatu Aplikasi Model Vector Autoregressive, VAR). Journal of Indonesian Applied Economics, 1(1), 59-73.

Downloads

Download data is not yet available.

Similar Articles

1-10 of 153

You may also start an advanced similarity search for this article.