Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis
AbstractIn 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.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-054/4.
Date of creation: 30 May 2005
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inflation; monetary model; structural break; regime switching error correction model; co-breaking; Asian crisis; Indonesia;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-05 (All new papers)
- NEP-CBA-2005-06-05 (Central Banking)
- NEP-MAC-2005-06-05 (Macroeconomics)
- NEP-MON-2005-06-05 (Monetary Economics)
- NEP-SEA-2005-06-05 (South East Asia)
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