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Decentralization and Regional Inflation in Indonesia

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  • Darius Tirtosuharto
  • Handri Adiwilaga

Abstract

The link between decentralization and inflation as one of the key aspects of macro economic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, previous study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF).

Suggested Citation

  • Darius Tirtosuharto & Handri Adiwilaga, 2013. "Decentralization and Regional Inflation in Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 16(2), pages 1-18, October.
    • Handle: RePEc:idn:journl:v:16:y:2013:i:2g:p:1-18
    DOI: https://doi.org/10.21098/bemp.v16i2.441
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    Cited by:

    1. Harry Aginta & Masakazu Someya, 2022. "Regional economic structure and heterogeneous effects of monetary policy: evidence from Indonesian provinces," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-25, December.
    2. Vid Adrison & Masarina Flukeria, 2016. "Lowering Regional Inflation? Improve Budget Absorption," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 62, pages 67-77, August.
    3. Aginta, Harry, 2023. "Revisiting the Phillips curve for Indonesia: What can we learn from regional data?," Journal of Asian Economics, Elsevier, vol. 85(C).
    4. Jaka Sriyana, 2018. "Inflationary effects of fiscal and monetary policies in Indonesia," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 674-688, June.
    5. Rudi Purwono & Mohammad Zeqi Yasin & M. Khoerul Mubin, 2020. "Explaining regional inflation programmes in Indonesia: Does inflation rate converge?," Economic Change and Restructuring, Springer, vol. 53(4), pages 571-590, November.
    6. Harry Aginta, 2022. "Spatiotemporal analysis of regional inflation in an emerging country: The case of Indonesia," Regional Science Policy & Practice, Wiley Blackwell, vol. 14(3), pages 667-688, June.
    7. Harry Aginta, 2021. "Spatial dynamics of consumer price in Indonesia: convergence clubs and conditioning factors," Asia-Pacific Journal of Regional Science, Springer, vol. 5(2), pages 427-451, June.

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    More about this item

    Keywords

    Decentralization; Regional Inflation Convergence; Regional Institution;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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