ABSTRACT
In recent years, the government of Indonesia has intensively increased their spending for development, especially infrastructure. As a developing country with low technology, Indonesia needs to import the development component/material from foreign countries, which may result in the depreciation of the Indonesian rupiah (domestic currency). In contrast, the aggregate demand for local goods is higher because private spending would prefer to consume local goods. This will increase economic growth and appreciate domestic currency. In order to find an explanation for these contradictory outcomes, this study uses a structural vector autoregressive method with macroeconomic factors such as taxation, economic output, and trade balance as the transmission. This is because the increased spending does not directly affect foreign currency, but it is transmitted through government revenue, economic output, and trade balance. By using quarterly data, this study provides another view on related topics because previous research concludes that government expenditure shock will appreciate the foreign exchange rate highly.
