Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia

This study investigates the significance of Divisia monetary aggregates in formulating the monetary policy in Indonesia. A money demand function has been constructed to compare the relative performance for Simple-sum M1 and M2 (SSM1 and SSM2) and Divisia M1 and M2 (DM1 and DM2) monetary aggregates. The econometrics testing procedures that have been utilized in the estimation include unit root test, cointegration test, Vector Error Correction Model (VECM), Granger causality test and residual test. Empirical findings indicate that only DM1 model yields credible result amongst all of the money demand models. The obtained coefficients for DM1 model are consistent with a prior theoretical expectation and carry plausible magnitudes. The DM1 model is satisfactory as proven by the diagnostic tests. Divisia monetary aggregates are proven not only theoretical superior but also empirical valid as useful measurement of money for the case of Indonesia. The central bank of Indonesia may consider using Divisia monetary aggregates as the policy variables in formulating monetary policy.Money Demand; Divisia Money; VECM

Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia

This study investigates the significance of Divisia monetary aggregates in formulating the monetary policy in Indonesia. A money demand function has been constructed to compare the relative performance for Simple-sum M1 and M2 (SSM1 and SSM2) and Divisia M1 and M2 (DM1 and DM2) monetary aggregates. The econometrics testing procedures that have been utilized in the estimation include unit root test, cointegration test, Vector Error Correction Model (VECM), Granger causality test and residual test. Empirical findings indicate that only DM1 model yields credible result amongst all of the money demand models. The obtained coefficients for DM1 model are consistent with a prior theoretical expectation and carry plausible magnitudes. The DM1 model is satisfactory as proven by the diagnostic tests. Divisia monetary aggregates are proven not only theoretical superior but also empirical valid as useful measurement of money for the case of Indonesia. The central bank of Indonesia may consider using Divisia monetary aggregates as the policy variables in formulating monetary policy

The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function

Using the consumer theory approach as suggested by Habibullah (2009), this study aims to shed new light on monetary authority by incorporating advertising expenditure, a variable that has been neglected in the past, into study of the money demand function in Indonesia. In addition, different measurements of monetary aggregates (simple-sum and Divisia money) have been used in the estimation to provide better insight into the selection of a suitable monetary policy variable for the case of Indonesia. Empirical findings from the error-correction model (ECM) indicate that the advertising expenditure variable has a significant impact on the demand for money. Furthermore, as compared to simple-sum money, the model that used Divisia monetary aggregates rendered more plausible estimation results in the estimation of money demand function

The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function

Using the consumer theory approach as suggested by Habibullah (2009), this study aims to shed new light on monetary authority by incorporating advertising expenditure, a variable that has been neglected in the past, into study of the money demand function in Indonesia. In addition, different measurements of monetary aggregates (simple-sum and Divisia money) have been used in the estimation to provide better insight into the selection of a suitable monetary policy variable for the case of Indonesia. Empirical findings from the error-correction model (ECM) indicate that the advertising expenditure variable has a significant impact on the demand for money. Furthermore, as compared to simple-sum money, the model that used Divisia monetary aggregates rendered more plausible estimation results in the estimation of money demand function

Assessing the role of advertising expenditure in money demand function using alternative monetary aggregations

Over the last decade, Brazil, Russia, India and China (BRIC countries) have experienced the fastest and most active economic growth among emerging countries. However, the rapid financial developments in these countries have altered their monetary policy channels and threatened the stability of their money demand functions. To formulate a more credible and well-defined money demand function (MDF), the potential regressee and regressors must be identified. In this thesis, a non-traditional regressor, the advertising expenditure (ADEX) variable, was incorporated in the estimation of MDF for BRIC countries. In addition, to compare the performance of other alternative monetary aggregates for BRIC countries’ MDF, the simple-sum, Divisia and currency-equivalent (CE) money for both M1 and M2 were included in the analyses. For this purpose, the indices and monetary aggregates for Divisia and CE were then constructed using a “self-developed” data template. The impact of the role of ADEX on BRIC countries' MDF and the performance of monetary aggregates were examined with an autoregressive distributed lag (ARDL) approach. Supportive evidence for the use of ADEX in formulating the MDF for BRIC countries was found. Empirical findings indicated that ADEX can positively influence the demand for money in both the short and long term, as in the case of BRIC countries. Moreover, use of the Divisia M2 (DM2) monetary aggregate in MDF was superior to the other monetary aggregates since more plausible results that were consistent with a priori theory were generated in the case of Brazil, India and China. For Russia, both Divisia M1 ii (DM1) and DM2 monetary aggregates outperformed their simple-sum counterpart and CE aggregates. Therefore, the present thesis adds to the existing body of knowledge on MDF by empirically exploring the impact of ADEX on money demand and on this proposed variable, which can be considered a non-traditional regressor for the estimation of MDF in future research. Furthermore, the significance of Divisia monetary aggregates must be highlighted, especially in generating a sound MDF and for monetary policy implementation purposes. By and large, a better understanding of the cause and effect of the demand for money may help policymakers in devising the best monetary policy for a country

The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function

Using the consumer theory approach as suggested by Habibullah (2009), this study aims to shed new light on monetary authority by incorporating advertising expenditure, a variable that has been neglected in the past, into study of the money demand function in Indonesia. In addition, different measurements of monetary aggregates (simple-sum and Divisia money) have been used in the estimation to provide better insight into the selection of a suitable monetary policy variable for the case of Indonesia. Empirical findings from the error-correction model (ECM) indicate that the advertising expenditure variable has a significant impact on the demand for money. Furthermore, as compared to simple-sum money, the model that used Divisia monetary aggregates rendered more plausible estimation results in the estimation of money demand function