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in the analysis of the balance of payments, mainly
located on the aspects of the factors that influence it,
Table 1: BOP, Inflation, Interest Rate, Exchange
Rate, Money Supply and GDP in 2013:1-2017:4.
Source: Badan Pusat Statistik and Bank Indonesia
the mechanisms of influence and propositions on the
balance of payments.
A few researchers who have examined the
balance of payments in Indonesia, some of them such
as (Boediono, 1979) with simultaneous models;
(Hakim, 2000) and (Nusantara, 2000) with a single
dynamic equation; (Masdjojo, 2010) and (Effendy,
2014) with a model ECM and (Astuti et al., 2015)
with a model of Thirlwall and Hussain. Most of these
studies use monetary and Keynesian approach. These
approaches explained that inflation, exchange rates,
interest rates, money supply and Gross Domestic
Product (GDP) have relevance in determining the
balance of the current account and capital account
ultimately affect the BOP.
According to Keynesian theory, if the inflation
rate of a country relatively increases toward trading
partner countries, the current account balance will
decrease due to the increase of imports. If the value
of imports is higher than exports, it would cause a
deficit of the balance of payments by the trade
balance. Furthermore, the Keynesian elasticity
approach views that the trade balance will only
increase when the real exchange rate depreciates if
the conditions of the Marshall-Lerner fulfilled. When
the real exchange rate depreciates, it will cause the
price of goods produced by the country abroad to be
cheap and the price of foreign goods in the country is
becoming more expensive. This condition will
automatically increase exports and surplus of the
balance of payments (Salvatore, 1997). However, the
data shows that at Qtly. IV-2014 inflation rose to 8.36
percent, but in the same period, BOP recorded a
surplus of USD 2,410 million. Other than that, at
Qtly. II-2015 exchange rate depreciated from
Rp12,807/USD to Rp13,131/USD, but in the same
period, BOP recorded a deficit of USD 2,925 million.
This condition is not in accordance with Keynesian
theory.
Through the transmission of multiplier effects,
the Keynesian theory explains the relationship
between GDP and BOP, where if aggregate income
increases, imports will increase and a BOP deficit will
occur. Whereas Monetarists theory explains that GDP
will affect the balance in the domestic money market
through changes to the domestic demand for money
that would bring in a surplus of the BOP. On the other
hand, Keynesian through revenue mechanisms
explains that the relevance of interest rates and BOP,
where if interest rates rise, the decline in investment
and a decline in aggregate income. This condition will
reduce imports and cause the BOP surplus. his theory
supports the results of (Ehikioya & Mohammed,
2015) and (Chinedu, 2018) research which show
results are statistically very small, in other words, the
positive relationship between interest rates and
balance of payments in Nigeria.
While the Monetary theory explains if interest
rates rise then through the balance of the money
market, domestic money demand will increase so that
the value of the domestic currency appreciates. This
condition reduced exports and caused a balance of
payments deficit. Monetarists outlook is consistent
with the results of the study (Masdjojo, 2010) find
that interest rates negatively affect balance of
payments in both the short and long-term.
Furthermore, this theory explains the relationship of
money supply and the balance of payments based on
the view that the balance of payments is a monetary
phenomenon, where there is a relationship between
the balance of payments of a country and the supply
of money in it. The disproportion of the balance of
payments is a reflection of an disproportion in the
money market. Balance of payments surplus is a
reflection of the excess money supply, while the
balance of payments deficit is a reflection of the
excess demand for money (Nopirin, 2000).
Generally, this paper analyzes the
interdependence of factors affecting Indonesia's
balance of payments due to the conventional theory
of macroeconomics, economic variables often have
links with each other. Changes or shocks to one
economic variable will also affect changes in other
variables. The relationship is not even a one-way
relationship but is a reciprocal relationship (Halwani,
2002). The purpose of this paper to analyze the
relationship and to analyze the contribution of shock
UNICEES 2018 - Unimed International Conference on Economics Education and Social Science
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