Inflation Nexus in Indonesia: Evidence from a P-Star Analysis

In this paper the effect of excess narrow money (MI) on C PI intlation in Indonesiabefore, during, and after the Asian crisis is empirically examined. The standard model for themonetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), isapplied and tested empirically using quarterly Indonesian data between 1981 and 2002. Theempirical model is a Markov switching error correction model. The results show that the tworegime P-star model, in terms of excess MI, tracks the long run dynamics of CPI inflation inIndonesia remarkably weIl. Hence, there is an empirical support for the assertion that longrun CPI intlation in Indonesia is a monetary phenomenon. In addition, there is evidence of aco-breaking relationship between excess MI and consumer prices in Indonesia during theAsian crisis

POLICY RULES UNTUK PENGENDALIAN INFLASI SECARA FORWARD LOOKING

Selaras dengan pesan inti UU No.23/1999 tentang kewajiban Bank Indonesia untuk menjaga stabilitas internal dan eksternal nilai Rupiah, maka stabilisasi laju inflasi dalam jangka panjang merupakan agenda utama yang perlu diupayakan secara sungguh-sungguh pencapaiannya. Pesan implisit undang-undang agar Bank Indonesia melalui kebijakan moneternya mencapai sasaran laju inflasi yang rendah dan stabil, bertolak dari argumen mengenai pentingnya stabilisasi laju inflasi bagi perekonomian secara makro. Sebagaimana telah banyak dikemukakan oleh para akademisi dan praktisi, manfaat stabilisasi inflasi pada intinya berkisar pada biaya yang harus ditanggung oleh perekonomian jika laju inflasi berada pada level yang tinggi dan tidak stabil

The narrow money demand behaviour in Indonesia, 1970-2005

This paper specifies a simple partial adjustment model of narrow money demand for Indonesia in an open economy context and estimates it with annual data for the period 1970-2005. Empirical results suggest that real income, inflation (a proxy for expected inflation), and the return on foreign financial assets are the major determinants of narrow money demand in this country. The deposit rate of interest (a proxy for the interest rate on alternative domestic financial assets) is statistically insignificant. The CUSUM and CUSUMSQ of residuals' tests suggest that the narrow money demand function remained stable during the sample period of study. Having selected an empirically parsimonious model, both the recursive and rolling regression techniques are applied to investigate the possibility of structural change in the regression coefficients possibly due to financial reforms and innovations since the early 1990s. Empirical results suggest that since the late 1990s the long-run income elasticity of the demand for narrow money has remained relatively stable around a value not different from one while the narrow money demand elasticities with respect to the rates of inflation and the return on foreign financial assets have declined markedly. The paper interprets the overall empirical results in a historical context and draws implications on the strategy of monetary policy in Indonesia