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The Role of Interest Rates and Provincial Monetary Aggregate in Maintaining Inflation in Indonesia

Author

Listed:
  • Chandra Utama

    (Parahyangan Catholic University)

  • Miryam B.L. Wijaya

    (Parahyangan Catholic University)

  • Charvin Lim

    (Parahyangan Catholic University)

Abstract

Inflation is a regional phenomenon hence the use of provincial data might be more appropriateon explaining the relationship between monetary policy and inflation. This paper analyzes the impact of changes in provincial money supply, the policy rate, and the interbank rate on regional inflation, within the framework of Hybrid New Keynesian Phillips Curve (HNKPC). This paper employs Generalized Method of Moments (GMM) on panel data of 32 provinces from 2005-III to 2014-IV. The estimation result shows that provincial monetary aggregate influence inflation significantly only in Sumatera. Furthermore, the policy fate affects the inflation in Sumatera and Kalimantan-Sulawesi. Using the interbank money rate, the result shows this rate also affect the inflation in most of the region except Kalimantan-Sulawesi. These findings show the price-based policy is more significant on affecting the provincial inflation compared to the provincial money supply.

Suggested Citation

  • Chandra Utama & Miryam B.L. Wijaya & Charvin Lim, 2017. "The Role of Interest Rates and Provincial Monetary Aggregate in Maintaining Inflation in Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 19(3), pages 267-286, January.
    • Handle: RePEc:idn:journl:v:19:y:2017:i:3:p:267-286
    DOI: https://doi.org/10.21098/bemp.v19i3.666
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    References listed on IDEAS

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    1. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
    2. Kate Phylaktis & David Blake, 1993. "The fisher hypothesis: Evidence from three high inflation economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 129(3), pages 591-599, September.
    3. Masagus M. Ridhwan & Henri L. F. Groot & Piet Rietveld & Peter Nijkamp, 2014. "The Regional Impact of Monetary Policy in Indonesia," Growth and Change, Wiley Blackwell, vol. 45(2), pages 240-262, June.
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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R19 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Other

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