Granger-Causality Between Inflation, Money Growth, Currency Devaluation and Economic Growth in Indonesia, 1951-2002
This paper uses annual data for the period 1952-2002 to investigate the inflationary process in Indonesia within the cointegration and Granger´s causality framework. The empirical results suggest that the consumer price index (CPI), the stock of narrow (M1) or broad money (M2) and real permanent income form a weakly cointegral relationship for the complete sample period. This relationship remains broadly stable for several sub-samples, especially when the model is estimated with the narrow definition of money. Three testable hypotheses in particular are investigated: (1) Does the money supply growth Granger-cause inflation? (2) Does currency devaluation Granger-cause inflation? (3) Does inflation affect economic growth? The empirical results suggest that in Indonesia, there existed a bi-directional causality between money supply growth and inflation and between currency devaluation and inflation. For the complete sample period, the causality running from inflation to narrow money supply growth was stronger than that from narrow money supply growth to inflation. This result is consistent with the view that in high-or hyperinflationary economies, inflation does have a strong feedback effect on money supply growth and this generates a self-sustaining inflationary process. The bi-directional causality between currency devaluation and inflation was, however, weak or not so robust for the complete or any shorter sample period. On the relationship between inflation and economic growth, the results suggest that there was no causality from inflation to economic growth for the complete or any sub-sample period.
Volume (Year): 2 (2005)
Issue (Month): 3 ()
|Contact details of provider:|| Web page: http://www.usc.es/economet/eaa.htm|
|Order Information:|| Web: http://www.usc.es/economet/info.htm Email: |
References listed on IDEAS
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.:
- Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
- Laurence Ball, 1990.
"Why Does High Inflation Raise Inflation Uncertainty?,"
NBER Working Papers
3224, National Bureau of Economic Research, Inc.
- Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
- Abdelhak Senhadji & Mohsin S. Khan, 2000.
"Threshold Effects in the Relationship Between Inflation and Growth,"
IMF Working Papers
00/110, International Monetary Fund.
- By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
- Fischer, Stanley, 1993.
"The role of macroeconomic factors in growth,"
Journal of Monetary Economics,
Elsevier, vol. 32(3), pages 485-512, December.
- Leamer, Edward E., 1985. "Vector autoregressions for causal inference?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 255-304, January.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- K. D. Thomas & P. Drysdale, 1964. "Indonesian Inflation 1951‐60," The Economic Record, The Economic Society of Australia, vol. 40(92), pages 535-553, December.
- Bruno, Michael & Easterly, William, 1995.
"Inflation crises and long-run growth,"
Policy Research Working Paper Series
1517, The World Bank.
- Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
- De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
- Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
- Peter Doyle & Peter F. Christoffersen, 1998. "From Inflation to Growth; Eight Years of Transition," IMF Working Papers 98/100, International Monetary Fund.
- Akhtar Akhtar Hossain, 2002. "Exchange Rate Responses to Inflation in Bangladesh," IMF Working Papers 02/166, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:eaa:ijaeqs:v:2:y2005:i:3_4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.