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Redenomination: Why is It Effective in One Country but Not in Another?

Author

Listed:
  • Erwin Bramana Karnadi

    (Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia, Jakarta, Indonesia,)

  • Putu Rusta Adijaya

    (Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia, Jakarta, Indonesia)

Abstract

The real impact of redenomination is still an on-going debate in the academic world. Redenomination is process decreasing values of a currency without changing its real currency exchange rate. In this research, we are using a panel data set obtained from The World Bank to estimate the impact of redenomination on macroeconomic variables such as inflation rate, real gross domestic product (GDP) per capita and real currency exchange rate. We decided to use fixed effects estimators to take into account the impact of specific characteristics of each country. We concluded that redenomination can significantly decrease estimated inflation rate and increase estimated real GDP per capita. We also concluded that redenomination has no significant impact on estimated real currency exchange rate. However, the effectiveness of redenomination depends on the country's government effectiveness and political stability which will improve country's economic conditions and their competitiveness.

Suggested Citation

  • Erwin Bramana Karnadi & Putu Rusta Adijaya, 2017. "Redenomination: Why is It Effective in One Country but Not in Another?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 186-195.
    • Handle: RePEc:eco:journ1:2017-03-26
    as

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    References listed on IDEAS

    as
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    3. Fic, Tatiana & Saqib, Omar Farooq, 2006. "Political Instability and the August 1998 Ruble Crisis," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 764-783.
    4. Ernest Simeon Odior Ph.D & AFOLASHADE ABIBAT SHODEINDE, 2013. "Currency Restructuring Exercise in Nigeria: overview and Potential Implications," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 3(6), pages 8-16, June.
    5. Vivian Dzokoto & Edwin Mensah & Maxwell Twum-Asante & Annabella Opare-Henaku, 2010. "Deceiving Our Minds: A Qualitative Exploration of the Money Illusion in Post-redenomination Ghana," Journal of Consumer Policy, Springer, vol. 33(4), pages 339-353, December.
    6. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
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    More about this item

    Keywords

    Fixed Effects Estimators; Redenomination; Government Effectiveness; Political Stability;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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