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Stability of the Demand for Real Narrow Money in lndonesia

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  • Reza Anglingkusumo

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    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank Indonesia, Jakarta)

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    Abstract

    The stability of the demand for real Ml in Indonesia is empirically examinedusing quarterly data between 1981 and 2002. A cointegrated VAR methodology thatisolates the period of structural breaks in the data generating process of the variables,caused by the Asian crisis, is used. The results show that the nominal Ml demandfunction is long run homogenous in the price level and the price level itself isendogenous in the equation for nominal Ml. Therefore, a reparameterization towardsthe real Ml demand function is necessary. In the pre and post Asian crisis era, thedemand function for real Ml in Indonesia is empirically stable and consists of a smallnumber of variables. In the long run, the real private household consumption spendingforms the permanent part of the demand for real Ml balances. Meanwhile, in theshort run, the opportunity cost of holding real Ml balances, measured by the l-monthnominal interest rate of time deposits in commercial banks, and agents' seasonalpreference for real money balances, are key determinants of the demand for real Mlbalances. In addition, there is evidence of a co-breaking relationship between the realMl balances and the real private household consumption spending in Indonesiaduring the Asian crisis.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-051/4.

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    Date of creation: 19 May 2005
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    Handle: RePEc:dgr:uvatin:20050051

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: money demand; cointegrated V AR; structural breaks; co-breaking; Asian crisis; Indonesia;

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    1. Bent Nielsen, 2000. "Cointegration Analysis in the Presence of Structural Breaks in the Deterministic Trend," Econometric Society World Congress 2000 Contributed Papers 1494, Econometric Society.
    2. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    3. Hendry, David F, 1997. "The Econometrics of Macroeconomic Forecasting," Economic Journal, Royal Economic Society, vol. 107(444), pages 1330-57, September.
    4. Grayham E. Mizon & David F. Hendry, 1998. "Exogeneity, causality, and co-breaking in economic policy analysis of a small econometric model of money in the UK," Empirical Economics, Springer, vol. 23(3), pages 267-294.
    5. Reza Anglingkusumo, 2005. "Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis," Tinbergen Institute Discussion Papers 05-054/4, Tinbergen Institute.
    6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    7. Inoue, Atsushi, 1999. "Tests of cointegrating rank with a trend-break," Journal of Econometrics, Elsevier, vol. 90(2), pages 215-237, June.
    8. David F. Hendry & Katarina Juselius, 2001. "Explaining Cointegration Analysis: Part II," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-120.
    9. Scott, Alasdair, 2003. "APPLIED MACROECONOMETRICS Carlo A. Favero Oxford University Press, 2001," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 313-315, April.
    10. Ericsson, Neil R & Hendry, David F & Mizon, Grayham E, 1998. "Exogeneity, Cointegration, and Economic Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 370-87, October.
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