Chandrarin, Grahita ORCID: https://orcid.org/0000-0002-7024-1315, Sohag, Kazi, Cahyaningsih, Diyah Sukanti ORCID: https://orcid.org/0000-0002-9810-5075 and Yuniawan, Dani ORCID: https://orcid.org/0000-0001-9343-0349 (2022) The response of exchange rate to coal price, palm oil price, and inflation in Indonesia: Tail dependence analysis. Resources Policy, 77 (102750). pp. 1-11. ISSN 0301-4207

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Abstract

Given the significant concerns of currency devaluation and level of inflation in Indonesia, we measure their dynamic connectedness and cross-quantile dependence with prominent export items such as crude palm oil price and coal price. To this end, we apply the frequency connectedness approach and Cross-Quantilogram approach to measure volatility spillover utilising daily data from 2002 to 2021. The frequency connectivity analysis coincides with our proposition that exchange rate and inflation substantially respond to coal and crude palm oil prices. Next, we apply the cross-quantilogram framework to examine the cross quantile dependence between exchange rate and other variables to capture the spillovers between these markets considering a wide range of market conditions. Our empirical analysis demonstrates that exchange and inflation are connected during extreme market volatility when they boom together. The exchange rate responds to palm oil price at the extreme quantile of the exchange rate in long-term horizons. The degree of connectedness between exchange rate and coal price is profound at the higher quantile in the long run horizon while it dissipates in the short run. Our findings provide important policy implications to the energy and monetary authority of Indonesia.

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