This study investigates the determinants and causality between economic openness and real exchange rates in Indonesia and the Philippines. This study uses time series from 1970 up to 2017 and the cross section is 2 countries (Indonesia and Philippines) using a simultaneous equation model panel. Indonesia has a low level of economic openness and high fluctuations in the real exchange rate, while the Philippines has a high level of economic openness and low real exchange rate fluctuations.The important findings in this study are; First, economic openness in Indonesia is positively influenced by terms of trade and inflation, while in the Philippines it is positively affected by terms of trade and real exchange rates; Second, the strength of real exchange rates in Indonesia is positively influenced by money supply, net foreign assets, and economic openness, besides that it is negatively affected by inflation, while in the Philippines it is positively affected by the money supply; Third, economic opennes that affect the real exchange rate in Indonesia and the real exchange rate that affects the economic openness in the Philippines. Based on this, the Philippines is used as a reference to improve the conditions of economic openness and fluctuations in the real exchange rate in Indonesia so that Indonesia can improve the conditions of economic openness and control the fluctuations in the real exchange rate.
Terms of Trade Disturbances, Real Exchange Rates and Welfare: The Role of Capital Controls and Labor Market Distortions
