The Causal Relationship between Exchange Rates and Bond Yield in Indonesia

The aim of this study was to examine the causal relationship between exchange rate and bond yield in Indonesia using monthly time series data from January 2006 to December 2018. The exchange rate was proxied by IDR/USD, while the bond yield was proxied by a 10-year government bond yield. The VAR model and Granger causality test were used to test the relationship. The results of the test revealed that in the short-run, there is a two-way relationship between IDR/USD exchange rate and government bond yield. In the short term, the response of the government bond yield to the IDR/USD exchange rate was very strong (significant1%) and also positive in the first three months period. Meanwhile, the response of the IDR/USD exchange rate against the government bond yield was weak (significant 10%). In addition, it was negative in the first 3.5 month period. Furthermore, the study revealed that there is no long-term relationship between the IDR/USD exchange rate and the government bond yield.