Impact of Yuan Devaluation on Indonesian EconomySimultaneous Equation Model Approach

This paper examines and provides an analysis regarding the impact of an economic shock, yuan devaluation, on the Indonesian economy. We analyze a simulation scenario by using simultaneous equation model with two-stage least square (2SLS) method. Empirical findings exhibit that shock has the significant impact on Indonesian economy through both of trade and investment transmissions. In trade block, Indonesian export to China has the most decreasing rather than others countries because of yuan more decrease than rupiah. In investment block, a total of investment gets the impact to rise, particularly in Foreign Direct Investment (FDI) from China, caused by decreasing wealth of foreign investors in China. Meanwhile, in the monetary block, the value of rupiah and Indonesian GDP simultaneously get the impact to decline, whereas yuan devalution leads Indonesian inflation to rise. Therefore, it is essential for the government to decrease Indonesian dependence on China, particularly in trade block. Some options which government should implement are market diversification and increasing export products quality.