The Real Exchange Rate and Trade Balance in Bilateral Trade Indonesia-America: Testing for the Validity of The J-Curve Phenomenon and The Marshall-Lerner Condition

R. Laksono, Khairul Saleh, Suryana

Abstract

International trade, particularly bilateral business relations between Indonesia and the United States, has demonstrated that in the short term, decline in the value of the national currency against foreign currencies does not always immediately improve the trade balance due to a phenomenon known as the J-Curve. This study also tests the validity of the Marshall-Lerner Condition, which states that depreciation will only have a favorable effect on the trade balance if the total of the elasticities of export and import demand is greater than one. Data processing conducted using empirical data from 2010 to 2023 reveals a research gap, where fluctuations in the real exchange rate have no effect on the trade balance in the long term. This means that the influence of the real exchange rate will not improve the performance of the Indonesia-US trade balance during this period. This is due to several factors, not only economic but also other factors such as political, social, and cultural factors. However, in the short term, fluctuations in the real exchange rate do affect the trade balance. The results of this study are expected to provide policymakers in Indonesia in designing effective exchange rate and foreign trade strategies to maintain macroeconomic stability.

Source: semanticscholar · PDF

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