Monetary Policy Response On Exchange Rate Volatility In Indonesia

Abstract

High fluctuation of exchange rate in short honzon is obviously making economic activity more risky as uncertainty rises. As it is not good for the economy, then there should be a systematic and measured policy to mitigate the foreign exchange fluctuations and to minimize the fluctuations. as well as to drive it to its fundamental value. In this part this research measures how persistent the exchange rate fluctuation m Indonesia 1s. and how are thus the central banks able to perform appropriate monetary policy. especially in determining their policy interest rate. or to make foreign exchange intervention to stabilize the exchange rate. In this study, USDllDR volatility is investigated usmg TGARCH approach. The result reveals that, USDllDR volatility in Indonesia is obviously persistent. This study also presents the outcomes of effectiveness of policy response by the Central Bank. Foreign-exchange sale interventions by the Central Bank lead to a slight USDllDR decrease Whatever Bank of Indonesia's efforts to exert a stabilizing effect of foreign exchange interventions, the results are inconclusive.