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Inflation expectations formation and financial stability in Indonesia

Author

Listed:
  • Ishak-Kasim, Syurkani
  • Ahmed, Abdullahi D.

Abstract

This paper examines the role of expectations in explaining the dynamics of inflation, interest rates and other key financial variables in Indonesia using VAR and error correction analyses. It is found that deposit interest rates, exchange rates and oil prices have significant impact on the expectations formation. We also found that administered prices are important, but their role decreases with time, while exogenous shocks remain a major source of movements in the expectations. The latter has long lasting effects and still accounts for more than 10 per cent of the variability of inflation expectations after the period of one year. This evidence shows the importance of inflation expectations formation, particularly on domestic financial stability.

Suggested Citation

  • Ishak-Kasim, Syurkani & Ahmed, Abdullahi D., 2009. "Inflation expectations formation and financial stability in Indonesia," MPRA Paper 27763, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27763
    as

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    File URL: https://mpra.ub.uni-muenchen.de/27763/1/MPRA_paper_27763.pdf
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    References listed on IDEAS

    as
    1. Osborn, Denise R., 1990. "A survey of seasonality in UK macroeconomic variables," International Journal of Forecasting, Elsevier, vol. 6(3), pages 327-336, October.
    2. Yash P. Mehra & Christopher Herrington, 2008. "On the sources of movements in inflation expectations : a few insights from a VAR model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 121-146.
    3. Tomasz Lyziak & Ewa Stanislawska, 2006. "Consumer inflation expectations Survey questions and quantification methods – the case of Poland," NBP Working Papers 37, Narodowy Bank Polski, Economic Research Department.
    4. Choy, Keen Meng & Leong, Kenneth & Tay, Anthony S., 2006. "Non-fundamental expectations and economic fluctuations: Evidence from professional forecasts," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 446-460, June.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    6. Dahl Christian M. & Hansen Niels L., 2001. "The Formation of Inflation Expectations under Changing Inflation Regimes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 4(4), pages 1-31, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation expectations; Formation; Financial Stability; Indonesia;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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