Application of the Vector Error Correction Model in Analyzing the Relationship of Macroeconomic Indicators in Indonesia Widyanti Rahayu, Amalia Syafira, Bagus Sumargo
Universitas Negeri Jakarta, Jakarta 13220
Abstract
National economic growth is a benchmark in an effort to achieve public welfare. In practice, national economic growth can be measured by several macroeconomic indicators, such as the JCI, Inflation, BI Rate, Exchange Rate, and Export Value. In analyzing the short-term and long-term relationship of these economic indicators, it can be done by using the Vector Error Correction Model (VECM). VECM can also be used to see the dynamic impact or response of a variable to shocks from other variables in the model by using the Impulse Response Function (IRF). Then the Variance Decomposition (VD) can be used to describe the contribution of each variable in the long-term relationship. VECM is used when there is cointegration among the variables in the model. From the analysis of the JCI, export value, exchange rate, inflation, and BI rate, there are 4 cointegration relationships that occur in the model. After performing the optimal lag test, the appropriate model is the VECM(1) ​-​-model. The results of the IRF analysis are 25 graphs, where each graph describes the response of a variable to shocks from other variables. With the analysis of Variance Decomposition, the result is that the BI rate is the most dominant variable that affects the exchange rate.
