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Oct 13, 2025 by leolavanderia.com.br 106 views

The Effect of Real Exchange Rates on Indonesian Bilateral Trade Balance: Marshall-Lerner Condition Analysis and J-Curve Phenomena

Introduction

The Indonesian economy has been heavily reliant on international trade, with its main trading partner being Japan. The real exchange rate has been a crucial factor in determining the competitiveness of Indonesian products in the global market. This study aims to investigate the impact of real exchange rates on Indonesia's bilateral trade balance with Japan, with a focus on the Marshall-Lerner condition and the J-curve phenomenon.

Understanding Real Exchange Rates and Trade Balance

Real exchange rates are a critical indicator of a country's competitiveness in international trade. When the real exchange rate weakens against a foreign currency, such as the Japanese yen, Indonesian products become cheaper for foreign consumers, potentially leading to an increase in exports. However, the market response to changes in exchange rates can be hampered by several factors, including the elasticity of demand for goods and the time needed by market participants to adjust to these changes.

The Marshall-Lerner Condition

The Marshall-Lerner condition is a fundamental concept in international trade that states that a devaluation of the exchange rate can improve the trade balance if the total elasticity of export and import demand is greater than one. In other words, if the demand for Indonesian exports and imports is highly responsive to price changes, a devaluation of the exchange rate can lead to an improvement in the trade balance. However, if demand is not responsive to price changes in the short term, the trade balance may not immediately experience improvement.

The J-Curve Phenomenon

The J-curve phenomenon is a concept that describes the relationship between exchange rates and trade balances over time. The curve is shaped like the letter "J," with the trade balance initially worsening after a devaluation of the exchange rate, followed by an improvement in the trade balance as market adjustments take place. The J-curve phenomenon is often observed in the long run, but not in the short term, as market responses to changes in exchange rates can be slow.

Methodology

This study used quarterly data series data from the January 1990 to April 2006 period obtained from the International Federal Statistics and Bank Indonesia. The method used in this study is the cointegration analysis and error correction model (ECM) to evaluate the impact of real exchange rates on the balance of Indonesia-Japan bilateral trade, both in the short and long term.

Results

The results of this study showed that in the long run, Indonesian bilateral trade with Japan met the requirements set by the Marshall-Lerner conditions. This means that the devaluation of real exchange rates has the potential to increase the trade balance. In addition, the J-curve phenomenon also occurs, where the positive effect of changes in the new exchange rate is seen after some time. In the short term, the Marshall-Lerner conditions are not met, which shows that the real exchange rate does not directly affect the trade balance. Therefore, the J-curve phenomenon does not occur in the short term.

Conclusion

In conclusion, this research confirms that the effect of real exchange rates on Indonesian bilateral trade balances with Japan is complex and varies depending on the analysis period. In the long run, market adjustments can provide positive results in accordance with the conditions of Marshall-Lerner and indicate the presence of J-curve phenomena. However, in the short term, the inability to immediately adjust to changes in exchange rates can cause the trade balance to remain unstable.

Policy Implications

By understanding the dynamics of real exchange rates and trade balances, policymakers can design more effective strategies to utilize exchange rates as a tool in increasing the balance of trade balance. This includes emphasis on the development of competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future.

Recommendations

Based on the findings of this study, the following recommendations are made:

Develop competitive products: Indonesian policymakers should focus on developing competitive products that can take advantage of changes in exchange rates.
Increase trade promotions: Increasing trade promotions can help Indonesian exporters respond to changes in exchange rates and improve the trade balance.
Monitor exchange rates: Policymakers should closely monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.
Invest in trade infrastructure: Investing in trade infrastructure, such as transportation and logistics, can help improve the efficiency of trade and respond to changes in exchange rates.

Limitations

This study has several limitations, including:

Data limitations: The data used in this study is limited to the January 1990 to April 2006 period, which may not reflect the current economic situation.
Methodological limitations: The cointegration analysis and error correction model (ECM) used in this study may not capture all the complexities of the relationship between real exchange rates and trade balances.
Theoretical limitations: The Marshall-Lerner condition and the J-curve phenomenon are theoretical concepts that may not fully capture the complexities of real-world economic phenomena.

Future Research Directions

Future research should focus on:

Updating the data: Updating the data to reflect the current economic situation can provide a more accurate picture of the relationship between real exchange rates and trade balances.
Using alternative methods: Using alternative methods, such as vector autoregression (VAR) or structural vector autoregression (SVAR), can provide a more comprehensive understanding of the relationship between real exchange rates and trade balances.
Investigating other factors: Investigating other factors, such as trade policies and economic shocks, can provide a more complete understanding of the relationship between real exchange rates and trade balances.
Frequently Asked Questions: The Effect of Real Exchange Rates on Indonesian Bilateral Trade Balance

Q: What is the Marshall-Lerner condition, and how does it relate to the effect of real exchange rates on trade balances?

A: The Marshall-Lerner condition is a fundamental concept in international trade that states that a devaluation of the exchange rate can improve the trade balance if the total elasticity of export and import demand is greater than one. In other words, if the demand for Indonesian exports and imports is highly responsive to price changes, a devaluation of the exchange rate can lead to an improvement in the trade balance.

Q: What is the J-curve phenomenon, and how does it relate to the effect of real exchange rates on trade balances?

A: The J-curve phenomenon is a concept that describes the relationship between exchange rates and trade balances over time. The curve is shaped like the letter "J," with the trade balance initially worsening after a devaluation of the exchange rate, followed by an improvement in the trade balance as market adjustments take place.

Q: How does the real exchange rate affect the competitiveness of Indonesian products in the global market?

A: When the real exchange rate weakens against a foreign currency, such as the Japanese yen, Indonesian products become cheaper for foreign consumers, potentially leading to an increase in exports. However, the market response to changes in exchange rates can be hampered by several factors, including the elasticity of demand for goods and the time needed by market participants to adjust to these changes.

Q: What are the policy implications of the findings of this study?

A: The findings of this study suggest that policymakers should focus on developing competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future. Additionally, policymakers should closely monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.

Q: What are the limitations of this study?

A: This study has several limitations, including data limitations, methodological limitations, and theoretical limitations. The data used in this study is limited to the January 1990 to April 2006 period, which may not reflect the current economic situation. Additionally, the cointegration analysis and error correction model (ECM) used in this study may not capture all the complexities of the relationship between real exchange rates and trade balances.

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

A: Future research should focus on updating the data to reflect the current economic situation, using alternative methods, such as vector autoregression (VAR) or structural vector autoregression (SVAR), and investigating other factors, such as trade policies and economic shocks, to provide a more complete understanding of the relationship between real exchange rates and trade balances.

Q: How can policymakers use the findings of this study to inform their trade policies?

A: Policymakers can use the findings of this study to inform their trade policies by focusing on developing competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future. Additionally, policymakers can use the findings of this study to monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.

Q: What are the implications of the J-curve phenomenon for trade policy?

A: The J-curve phenomenon suggests that trade policy should focus on developing competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future. Additionally, policymakers should closely monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.

Q: How can businesses use the findings of this study to inform their export strategies?

A: Businesses can use the findings of this study to inform their export strategies by focusing on developing competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future. Additionally, businesses can use the findings of this study to monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.

Q: What are the implications of the Marshall-Lerner condition for trade policy?

A: The Marshall-Lerner condition suggests that trade policy should focus on developing competitive products and increasing trade promotions to help respond to changes in exchange rates better in the future. Additionally, policymakers should closely monitor exchange rates and adjust their strategies accordingly to take advantage of changes in exchange rates.