THE OPTIMAL BASKET CURRENCY ARRANGEMENT FOR INDONESIA

• Main Author: Charvia, Brian
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/72315
• Institution: Institut Teknologi Bandung

The research is done based on the historical data obtained from official sites and trusted sources of Indonesia reserved currencies, trading activities, and exchange rate conditions. Exchange rate regime is a system in which country used to manage its currency in relation to other currencies and the foreign exchange market. There are two major types of exchange rate regimes such as floating system and pegged system. Many countries, including Indonesia adopted the free float system since it is believed as the best regime for absorbing external economic shocks. However, some economists argued that a moderate exchange rate regime, such as currency basket system, is a better approach for achieving the government’s goals. This research aims to provide an arrangement for optimal basket weights of Indonesian currency basket to minimize GDP fluctuation. Simple theoretical model was used as the first step to measure appropriate weights of external currencies to put in the basket. In this model, the basket currencies are assumed to have three-way interdependent relationship by including Rupiah as the home currency along with Yen and US Dollar as external currencies in the basket. The result shows that there is a gap between the actual and expected weights of currencies. Furthermore, we found that currency basket system is superior in maintaining the volatility of Indonesian GDP rather than the current free float system.