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Currency Crisis, Inflation and Stability of Demand for Broad Money: The Case of Indonesia

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  • Boaz Nandwa
  • Ramesh Mohan

Abstract

: In the aftermath of the Asian financial crisis, there was widespread concern among the Asian economies that this could potentially have resulted in persistent inflation with volatile money demand in the region. By employing multivariate cointegration methodology, this paper examines the implication of currency crisis on inflation and structural stability of demand for broad money in Indonesia. Recursive estimation and diagnostic tests were implemented to check parameter constancy across regime changes over the period 1991-2004 . The results indicate that controlling for structural breaks (except for 1997 and 1998) the demand for real broad money remained stable in the aftermath of the currency crisis in Indonesia. Further, the study finds evidence that changes in broad money, exchange rate depreciation, and interest rates have a significant impact on inflation inertia in Indonesia, both before and after the currency crisis.

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Article provided by IUP Publications in its journal The IUP Journal of Applied Economics.

Volume (Year): VII (2008)
Issue (Month): 6 (November)
Pages: 7-28

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Handle: RePEc:icf:icfjae:v:07:y:2008:i:6:p:7-28

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