Determinants of Rupiah Depreciation: Inflation, GDP Growth, Money Growth, and the Real Interest Rate, 1990–2025

Abstract

Main Objectives: This study examines the determinants of the annual depreciation rate of the Rupiah against the US dollar in 1990–2025, namely inflation, GDP growth, broad money growth, and the real interest rate, within the monetary approach to the exchange rate.

Background Problems: Indonesian growth has been stable at around 5% since 2014 while the Rupiah kept weakening, which raises the question of whether macroeconomic fundamentals still explain exchange rate movements.

Novelty: Earlier Indonesian studies use short samples (2013–2022 or 2015–2024) and level variables. This study uses 36 years of growth-rate indicators, tests stationarity explicitly, and controls for the 1997–1998 Asian financial crisis.

Research Methods: Annual World Development Indicators data (36 observations; 35 after differencing) are analysed with Augmented Dickey–Fuller tests and multiple linear regression (OLS) with a 1998 crisis dummy, classical assumption tests, and Newey–West robust standard errors.

Finding/Results: The exchange rate level is non-stationary (ADF = −1.01) whereas the four regressors are stationary, and a level regression (R² = 0.771) is outperformed by a time trend alone (R² = 0.885). Without the crisis control, GDP growth has a significant negative and money growth a significant positive effect on depreciation. With the 1998 dummy, only inflation is significant, with a negative sign (5% under OLS, 10% under robust standard errors).

Conclusion: The link between fundamentals and Rupiah depreciation in 1990–2025 is dominated by the 1998 crisis episode, so the results should be interpreted with caution and call for higher-frequency data and dynamic models.