Exchange rate volatility effect on Indonesia’s exports

Since the collapse of the Breton Wood system, many economists have scrutinized how exchange rate volatility affects world trade. This is because volatility can act as a barrier to international trade. Most empirical studies find that exchange rate volatility has a negative effect. We examine factors that correlate with export volumes on the demand side, especially the real exchange rate volatility determined by the moving average standard deviation. Our empirical research used Indonesia export panel data classified by 2 digits ISIC Rev.4 from the first quarter of 2005 to the fourth quarter of 2014. The results show that most producers in Indonesia respond to increased exchange rate volatility by reducing risky activity. Industries such as crops and animal production, coal and lignite mining, and manufacturing of paper and paper products; rubber and plastic products and basic metals all respond to volatility by increasing export activity in anticipation of expected dramatic profit reductions.