Analysis Of The Effect Of Macroeconomic Variables On The Demand Of Currency In Indonesia

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Introduction

The economic condition of a country can experience changes from time to time, influenced by various macroeconomic variables such as inflation, exchange rates, gross domestic product (GDP), unemployment, exports, and international trade. In this context, some macroeconomic variables are interconnected with each other and can be influenced by currency. Two variables that specifically have a relationship with currency are output and exchange rates. Indonesia, as a country that implements democratic policies and mixed economic systems, has experienced various dynamics in the macro economy, especially before and after the monetary crisis that struck in 1997.

Macroeconomic Variables and Currency Demand

Before the monetary crisis, Indonesia's macroeconomic showed stable growth every year, driven by expansion carried out by investors who increased productivity. However, when the monetary crisis occurred, Indonesia's economic conditions deteriorated; Productivity decreases and the value of macroeconomic variables has decreased significantly. In this analysis, we can see that currency has a very important role in the economic process. Currency is used in daily transactions by individuals, consumers, and producers. The demand and supply of money in the money market makes the value of money fluctuating and affecting various other economic aspects.

Methodology

The coefficient of determination is used to describe how much variations in independent variables can affect the dependent variable. In this analysis, using the E-Views 4.1 computer program, a R-Square value was obtained of 0.957. That is, the variable gross domestic product, bank interest rates, and the exchange rate can explain the variation of 95.7% of the demand for currency, while the remaining 4.3% is influenced by other variables that are not included in this model, or known as mistakes disturbance.

Results and Discussion

From the results of the analysis, it appears that gross domestic product and exchange rate have a positive influence on the demand for currency. This is in line with the existing hypothesis, where if other conditions are considered constant (ceteris paribus), an increase in GDP and the exchange rate will contribute to increasing the demand for cartal money. Conversely, Bank Indonesia's interest rates show a negative effect on the demand for currency, which means that an increase in interest rates tends to reduce the demand for currency, assuming other factors are fixed.

Conclusion

From this presentation, we can conclude that an understanding of the relationship between macroeconomic variables and demand for card money is very important for effective economic policies in Indonesia. Policies that pay attention to GDP stability and exchange rates can help encourage economic growth and ensure optimal demand for card money. In the future, there needs to be an effort to maintain macroeconomic stability so that the Indonesian economy can continue to grow and provide greater benefits for the community.

Recommendations

Based on the results of this analysis, the following recommendations can be made:

  • Maintain GDP stability: The government should focus on maintaining GDP stability to ensure optimal demand for card money.
  • Monitor exchange rates: The government should monitor exchange rates to ensure that they are stable and do not fluctuate excessively.
  • Adjust interest rates: Bank Indonesia should adjust interest rates to ensure that they are not too high, which can reduce the demand for currency.
  • Implement policies to promote economic growth: The government should implement policies to promote economic growth, such as investing in infrastructure and human capital.

Limitations of the Study

This study has several limitations, including:

  • Limited data: The study only used data from 1997 to 2007, which may not be representative of the current economic situation in Indonesia.
  • Simple model: The study used a simple model to analyze the relationship between macroeconomic variables and demand for card money, which may not capture all the complexities of the relationship.
  • Limited variables: The study only included a limited number of variables, such as GDP, exchange rates, and interest rates, which may not capture all the factors that influence demand for card money.

Future Research Directions

Based on the results of this study, several future research directions can be identified, including:

  • Using more advanced models: Future studies can use more advanced models, such as vector autoregression (VAR) models, to analyze the relationship between macroeconomic variables and demand for card money.
  • Including more variables: Future studies can include more variables, such as inflation, unemployment, and exports, to capture all the factors that influence demand for card money.
  • Using more recent data: Future studies can use more recent data to capture the current economic situation in Indonesia.

Conclusion

Q: What are the main macroeconomic variables that affect the demand for currency in Indonesia?

A: The main macroeconomic variables that affect the demand for currency in Indonesia are gross domestic product (GDP), exchange rates, and interest rates.

Q: How does GDP affect the demand for currency in Indonesia?

A: GDP has a positive influence on the demand for currency in Indonesia. This means that an increase in GDP will contribute to an increase in the demand for currency.

Q: How does exchange rate affect the demand for currency in Indonesia?

A: Exchange rate has a positive influence on the demand for currency in Indonesia. This means that an increase in exchange rate will contribute to an increase in the demand for currency.

Q: How does interest rate affect the demand for currency in Indonesia?

A: Interest rate has a negative influence on the demand for currency in Indonesia. This means that an increase in interest rate will contribute to a decrease in the demand for currency.

Q: What is the coefficient of determination (R-Square) in this study?

A: The coefficient of determination (R-Square) in this study is 0.957. This means that the variable GDP, exchange rate, and interest rate can explain the variation of 95.7% of the demand for currency.

Q: What are the limitations of this study?

A: The limitations of this study are:

  • Limited data: The study only used data from 1997 to 2007, which may not be representative of the current economic situation in Indonesia.
  • Simple model: The study used a simple model to analyze the relationship between macroeconomic variables and demand for card money, which may not capture all the complexities of the relationship.
  • Limited variables: The study only included a limited number of variables, such as GDP, exchange rates, and interest rates, which may not capture all the factors that influence demand for card money.

Q: What are the recommendations of this study?

A: The recommendations of this study are:

  • Maintain GDP stability: The government should focus on maintaining GDP stability to ensure optimal demand for card money.
  • Monitor exchange rates: The government should monitor exchange rates to ensure that they are stable and do not fluctuate excessively.
  • Adjust interest rates: Bank Indonesia should adjust interest rates to ensure that they are not too high, which can reduce the demand for currency.
  • Implement policies to promote economic growth: The government should implement policies to promote economic growth, such as investing in infrastructure and human capital.

Q: What are the future research directions of this study?

A: The future research directions of this study are:

  • Using more advanced models: Future studies can use more advanced models, such as vector autoregression (VAR) models, to analyze the relationship between macroeconomic variables and demand for card money.
  • Including more variables: Future studies can include more variables, such as inflation, unemployment, and exports, to capture all the factors that influence demand for card money.
  • Using more recent data: Future studies can use more recent data to capture the current economic situation in Indonesia.

Q: What are the implications of this study for policymakers in Indonesia?

A: The implications of this study for policymakers in Indonesia are:

  • The government should focus on maintaining GDP stability to ensure optimal demand for card money.
  • The government should monitor exchange rates to ensure that they are stable and do not fluctuate excessively.
  • Bank Indonesia should adjust interest rates to ensure that they are not too high, which can reduce the demand for currency.
  • The government should implement policies to promote economic growth, such as investing in infrastructure and human capital.