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Threshold effects of exchange rate depreciation and money growth on inflation

Author

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  • Rizki E. Wimanda

Abstract

Purpose - – This paper aims to investigate the impact of exchange rate depreciation and money growth to the consumer price index (CPI) inflation in Indonesia. Design/methodology/approach - – Using threshold model applied to Phillips curve equation. Findings - – Using monthly data from 1980:1 to 2008:12, the econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effect of exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4 percent, theF-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While two threshold values are found for money growth, i.e. 7.1 and 9.8 percent, and they are statistically different. The impact on inflation is high when money grows by up to 7.1 percent, it is moderate when money grows by 7.1-9.8 percent, and it is low when money grows by above 9.8 percent. Research limitations/implications - – This research is using methodology proposed by Hansen which the threshold is based on the minimum SSR. The value of SSR will differ from one model to one model. For example, model using quarterly data will give the different result from that using monthly or yearly data. Also, when the author uses the new data, the result could be different. Practical implications - – Even though inflation targeting framework has been adopted by Bank Indonesia (BI) since 2005, BI should not disregard the monetary aggregate variable, especially M1. This is because the growth of money is still matter to influence inflation in the short run. The impact on inflation is found to be larger than the impact of exchange rate depreciation when it is below a certain threshold value. Originality/value - – This is the first paper that evaluates the threshold effect of exchange rate and money growth in emerging country, especially in Indonesia.

Suggested Citation

  • Rizki E. Wimanda, 2014. "Threshold effects of exchange rate depreciation and money growth on inflation," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(2), pages 196-215, March.
    • Handle: RePEc:eme:jespps:v:41:y:2014:i:2:p:196-215
    DOI: 10.1108/JES-02-2012-0011
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    Citations

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    Cited by:

    1. Umar Bala & Patchaya Songsiengchai & Lee Chin, 2017. "Asymmetric behavior of exchange rate pass-through in Thailand," Economics Bulletin, AccessEcon, vol. 37(2), pages 1289-1297.
    2. Mohsen Bahmani-Oskooee & Ridha Nouira, 2021. "U.S. – Italy commodity trade and the J-curve: new evidence from asymmetry analysis," International Economics and Economic Policy, Springer, vol. 18(1), pages 73-103, February.
    3. Mohsen Bahmani-Oskooee & Huseyin Karamelikli, 2021. "The Turkey-US commodity trade and the asymmetric J-curve," Economic Change and Restructuring, Springer, vol. 54(4), pages 943-973, November.
    4. Mohsen Bahmani-Oskooee & Dan Xi & Sahar Bahmani, 2019. "More evidence on the asymmetric effects of exchange rate changes on the demand for money: evidence from Asian," Applied Economics Letters, Taylor & Francis Journals, vol. 26(6), pages 485-495, March.
    5. Mohsen Bahmani‐Oskooee & Abera Gelan, 2020. "The South Africa‐U.S. Trade and the Real Exchange Rate: Asymmetric Evidence from 25 Industries," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 186-203, June.
    6. Mohsen Bahmani-Oskooee & Ilir Miteza & Altin Tanku, 2020. "Exchange rate changes and money demand in Albania: a nonlinear ARDL analysis," Economic Change and Restructuring, Springer, vol. 53(4), pages 619-633, November.
    7. Bahmani-Oskooee Mohsen & Harvey Hanafiah, 2017. "The Asymmetric Effects of Exchange Rate Changes on the Trade Balance of Singapore," Global Economy Journal, De Gruyter, vol. 17(4), pages 1-11, December.
    8. Bahmani-Oskooee, Mohsen & Nouira, Ridha, 2021. "U.S.-German commodity trade and the J-curve: New evidence from asymmetry analysis," Economic Systems, Elsevier, vol. 45(2).
    9. Mohsen Bahmani-Oskooee & Muhammad Ali Nasir, 2020. "Asymmetric J-curve: evidence from industry trade between U.S. and U.K," Applied Economics, Taylor & Francis Journals, vol. 52(25), pages 2679-2693, May.

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