Effect of Exchange Rate Volatility and COVID-19 on Indonesia-United States Bilateral Trade

Exchange rate volatility has created many uncertainties and thus hampering bilateral trade flows among countries. These uncertainties are enormous and are affecting exporters’ and importers’ decisions regarding trade due to their risks and the resultant negative effect on profit in most countries. Indonesia and the United States were not an exception in this regard. Trade policies that are linked to uncertainties caused by exchange rate fluctuation are needed to stimulate trade among countries. To this end, this study analysed the effect of positive and negative changes in exchange rate volatility and the COVID-19 pandemic on the Indonesia-US bilateral commodity trade flow. A time series of data comprising 30 commodity exports and imports at harmonized system 2-digit code were scrutinized for the period 2010:M01-2021:M01. Our empirical strategies using the GARCH modelling approach, linear and nonlinear autoregressive distributing lag models revealed that: (i) linear ARDL exchange rate volatility asserts a positive effect on 9 commodity exports and 6 commodity imports from the US, (ii) in nonlinear ARDL 12 commodity exports and 8 commodity imports were positively affected by the exchange rate volatility. These findings indicate that exporters and importers tend not to care about the risk associated with exchange rate volatility, and (iii) the finding further revealed that in the export of commodities HS71, HS94, and HS95 there is evidence of asymmetric effect that differed in coefficient, sign, size, and duration. The practical significance of these findings is that policymakers should sidestep the strategy of a one-sided exchange rate policy to accommodate different risk behaviour as exhibited by exporters and importers. This would help maintain the stability of the exchange rate and promote trade flows.