The quest for explosive bubbles in the Indonesian Rupiah/US exchange rate: Does the uncertainty trinity matter?

TL;DR

This paper investigates the presence of multiple explosive bubbles in the Indonesian Rupiah/US dollar exchange rate using the GSADF method, revealing significant deviations and the influence of global geopolitical and economic uncertainties.

Contribution

It applies the GSADF technique to identify explosive bubbles in the exchange rate and examines the impact of geopolitical and economic uncertainties on these bubbles, providing new insights into exchange rate dynamics.

Findings

Multiple explosive bubbles detected in the exchange rate from 1985 to 2023.

Global geopolitical risk negatively influences speculative bubbles.

Economic policy uncertainty reduces the occurrence of bubbles.

Abstract

The Generalized Supremum Augmented Dickey-Fuller (GSADF) technique is performed to resolve whether the Indonesian Rupiah/US exchange rate has experienced multiple explosive bubbles. The GSADF uncovers that the Indonesian Rupiah/US exchange rate deviates from the fundamental values by six times from January 1985 to September 2023, periodically indicating the presence of numerous explosive behaviors. Once the full-sample period separates into the managed-floating regime and the free-floating regime, the GSADF still detects multiple bubbles. Of particular curiosity on uncertainty trinity, this study underlines that global geopolitical risk negatively drives explosive actions in the ratio of exchange rates for non-traded and traded goods. The global economic policy uncertainty negatively affects speculative bubbles in the exchange rate and the ratio of exchange rates for non-traded. The country's geopolitical risks negatively strike only speculative bubbles in the exchange rate. Further, we find heterogeneity in our results by examining different exchange rate systems. The robustness checks further firmly ascertain across baseline empirical findings.