The Effect of Monetary Policy and Macroeconomic Variables on Foreign Portfolio Investment in Indonesia

This study aims to identify and analyze the effect of monetary policy and macroeconomic variables on foreign portfolio investment in Indonesia. Liberalization and the integration of world financial markets encourages the movement of capital between countries, one of them in the form of portfolio investment. Foreign portfolio investment in Indonesia has a high volatility, which, in turn, may have negative consequences for the stability of the domestic financial market, so it needs to be analyzed in order to establish the determinants of the movements of foreign portfolio investment. This study used time series data from July 2005 to December 2015. The variables used consist of external variables (push factor) and domestic variables (pull factor) and the analytical method used is Structural VAR (Vector Auto Regression). The results showed that foreign portfolio investment responds significantly to changes in the federal funds rate and the Bank Indonesia rate, while, on the other hand, foreign portfolio investments respond, but not significantly, to changes in the real effective exchange rate, the Industrial Production Index, the Composite Stock Price Index, and the Dow Jones Industrial Average. Results of the forecast error variance decomposition state that the federal funds rate gives the largest contribution of the external variables (push factor) to changes in foreign portfolio investments in Indonesia.