Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis

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Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis

Author Info

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

Abstract

In this paper the effect of excess narrow money (MI) on C PI intlation in Indonesia before, during, and after the Asian crisis is empirically examined. The standard model for the monetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), is applied and tested empirically using quarterly Indonesian data between 1981 and 2002. The empirical model is a Markov switching error correction model. The results show that the two regime P-star model, in terms of excess MI, tracks the long run dynamics of CPI inflation in Indonesia remarkably weIl. Hence, there is an empirical support for the assertion that long run CPI intlation in Indonesia is a monetary phenomenon. In addition, there is evidence of a co-breaking relationship between excess MI and consumer prices in Indonesia during the Asian crisis.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-054/4.

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Date of creation: 30 May 2005
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Handle: RePEc:dgr:uvatin:20050054

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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: General - - - Hypothesis Testing

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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Reza Anglingkusumo, 2005. "Stability of the Demand for Real Narrow Money in lndonesia," Tinbergen Institute Discussion Papers 05-051/4, Tinbergen Institute. [Downloadable!]

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