Analysis Of Indonesian Economic Dynamics On The Balance Of Trade, Exchange Rate, And Foreign Investment: A Vector Errors Correction Model (Vecm)
Abstract
This study aims to analyze the effect of the Balance of Trade (BOT), Exchange Rate, and Foreign Direct Investment (FDI) on Indonesia’s economic growth during the period 1993–2023. The research applies a descriptive quantitative approach using annual time-series secondary data. The analytical method employed is the Vector Error Correction Model (VECM), preceded by stationarity tests, optimal lag selection, and cointegration tests to ensure the validity of the model. In addition, Granger Causality, Impulse Response Function (IRF), and Forecast Error Variance Decomposition (FEVD) analyses are conducted to examine both short-run and long-run dynamics among variables. The results indicate that in the short run, the Balance of Trade, Exchange Rate, and Foreign Direct Investment do not have a statistically significant effect on Indonesia’s economic growth. However, in the long run, the Exchange Rate and Foreign Direct Investment show positive and significant effects on economic growth, while the Balance of Trade remains insignificant. The Granger causality test reveals a one-way relationship, where economic growth influences the Balance of Trade, and Foreign Direct Investment influences economic growth. Overall, the findings suggest that exchange rate stability and sustained foreign investment inflows are key determinants of Indonesia’s long-term economic growth. Meanwhile, improvements in the structure and competitiveness of international trade are still necessary to strengthen the role of the external sector in supporting sustainable economic development.
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Copyright (c) 2026 Faradiah Khasny, Ignatia Martha Hendrati, Wirya Wardaya
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