Determinants of Equilibrium Real Exchange Rate and Its Misalignment in Indonesia (Post Crisis Era)

After applied the free floating exchange rate regime, the rupiah exchange rate was determined by the mechanism of market. The Central Bank did not have the obligation again to determine the rupiah exchange rate in certain level. It means that the movement of exchange rate in the money market is only influenced by fundamental factors for both economic and non economic. In this research paper, we determine equilibrium real exchange rate of rupiah in order to see the influence of fundamental factors toward rupiah exchange rate, and to understand the appropriate level or sustainability long term trend. Furthermore, we figure out the misalignment for real exchange rate of rupiah. The period of this research paper covers the post crisis era from 1999 until 2006 (quarterly). Using co-integrating regression, we find that variable of tnt and nfa have significant influence to real exchange rate. In contrary, variable of tot, openness, and fg do not influence significantly to real exchange rate of rupiah. Misalignment episode give us four patterns of situation during this period which are undervaluation during 2000Q2- 2002Q1 period and 2004Q2-2005Q3 period, and also overvaluation during 2002Q2- 2004Q1 period and 2005Q4-2006Q4.