FOREIGN EXCHANGE RATE PREDICTION OF INDONESIA'S LARGEST TRADING PARTNER BASED ON VECTOR ERROR CORRECTION MODEL

  • M. Fariz Fadillah Mardianto Department of Mathematics, Faculty of Science and Technology, Universitas Airlangga, Indonesia https://orcid.org/0000-0002-4541-4552
  • Muhammad Fikry Al Farizi Department of Mathematics, Faculty of Science and Technology, Universitas Airlangga, Indonesia
  • Made Riyo Ary Permana Department of Mathematics, Faculty of Science and Technology, Universitas Airlangga, Indonesia
  • Alfian Iqbal Zah Department of Mathematics, Faculty of Science and Technology, Universitas Airlangga, Indonesia
  • Elly Pusporani Department of Mathematics, Faculty of Science and Technology, Universitas Airlangga, Indonesia https://orcid.org/0000-0001-7948-3719
DOI: https://doi.org/10.30598/barekengvol18iss3pp1705-1718
Keywords: Exchange Rate, Prediction, Trade, VECM, Partnerships and Economic Growth

Abstract

Foreign exchange rates from the currencies of trading partners are a critical element in the development of Indonesia's economic landscape. As an active country in international trade, Indonesia's economic health is highly dependent on trade partnerships, movements, and interactions of foreign exchange rates from Indonesia's main trading partners. To achieve economic stability, Bank Indonesia intervenes in the foreign exchange market to keep the Rupiah exchange rate within a reasonable range. Indonesia is committed to achieving several points in the Sustainable Development Goals (SDGs), such as point 17, which emphasizes partnerships, and point 8, which underlines inclusive and sustainable economic growth. This commitment is an important factor in Indonesia's economic development. Therefore, it is necessary to predict the exchange rate value of Indonesia's largest trading partners considering these SDG aspects. In this study, the Vector Error Correction Model (VECM) was used to predict the foreign exchange rate of Indonesia's largest trading partners. The data used in this study is secondary data obtained from the investing.com webpage, comprising weekly data from January 2021 to November 2023. The foreign exchange rates of Indonesia's largest trading partners have a cointegration relationship, indicating long-term relationships and similarities in movements. The best model identified is VECM (1), with a very accurate MAPE value of 3.29%. The Impulse Response Function (IRF) analysis shows that the Chinese Yuan responds variably to different currencies, stabilizing over time. Variance Decomposition reveals that short-term fluctuations in the Chinese Yuan are primarily influenced by itself (87.89%) and significantly by the Singapore Dollar, South Korean Won, and Taiwan Dollar. The Granger Causality Test indicates that the Philippine Peso influences 11 other exchange rates, refining the VECM model and improving prediction accuracy. Indonesia is expected to build economic collaborations that can help achieve economic stability.

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Published
2024-08-02
How to Cite
[1]
M. F. Mardianto, M. Farizi, M. Permana, A. Zah, and E. Pusporani, “FOREIGN EXCHANGE RATE PREDICTION OF INDONESIA’S LARGEST TRADING PARTNER BASED ON VECTOR ERROR CORRECTION MODEL”, BAREKENG: J. Math. & App., vol. 18, no. 3, pp. 1705-1718, Aug. 2024.
Issue
Vol 18 No 3 (2024): BAREKENG: Journal of Mathematics and Its Application
Section
Articles

Copyright (c) 2024 M. Fariz Fadillah Mardianto, Muhammad Fikry Al Farizi, Made Riyo Ary Permana, Alfian Iqbal Zah, Elly Pusporani

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