Real Exchange Rate, Trade Balance and Deindustrialization in Indonesia

Amelia Nurunnisa, Fithra Faisal Hastiadi
This study raises the current issues in Indonesia that links the instability of exchange rates and deindustrialization phenomenon. This association has not been studied directly in previous researches. Using 2SLS method, the study finds that these problems are interrelated and cannot be separated from each other. Deindustrialization problems in Indonesia, which are explained by the decline in manufacturing exports, decline in manufacturing labor productivity, trade balance deficit and investment displacement from the tradable sector (manufacturing), directly and indirectly affect exchange rate. The implication of this study is that government should pay attention to Indonesian manufacturing sector in solving exchange rate problem.

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