Inflationary effects of fiscal and monetary policies in Indonesia

• Authors: Sriyana Jaka
• Languages of publication: EN

Abstracts

EN

This paper analyzes the effects of fiscal and monetary policies on inflation rate in Indonesia. This research uses the error correction model for estimating the empirical model of inflation rate for annual data 1970-2017. The results present the significant effects of fiscal and monetary variables on the inflation rate. These findings reveal the inflationary effects of fiscal and monetary policies in the country. This research also finds the impact of output and exchange rate on inflation rate. Therefore, this paper supports the theory of demand-pull inflation as well as the proposition of imported inflation. The other uniqueness of this research is the inclusion of shock variables in the empirical model. This study asserts the significant role of inflation shock and unanticipated exchange rate on the domestic price level. It implies that domestic inflation is closely related to the international financial sector.

Keywords

EN

Inflation; fiscal; monetary; shock; exchange rate

Discipline

• ECONOMICS: ECONOMICS

• Publisher: Prague Development Center, Czech Republic
• Journal: Business and Economic Horizons
• Year: 2018
• Volume: Volume 14
• Issue: Issue 3
• Pages: 674-688

Dates

published

2018-06-14

Contributors

author

Sriyana Jaka

• Department of Economics, Faculty of Economics, Islamic University of Indonesia, Indonesia

References

• Ajaz, T., Nain, M. Z., & Kamaiah, B. (2016). Inflation and openness in India: an asymmetric approach. Macroeconomics and Finance in Emerging Market Economies, 9(2), 190-203. http://doi.org/10.1080/17520843.2016.1162825
• Auerbach, A. J., Gale, W. G., & Harris, B. H. (2010). Activist fiscal policy. Journal of Economic Perspectives, 24(4), 141-164. http://doi.org/doi=10.1257/jep.24.4.141
• Berument, H., & Doan, B. (2003). Openness and the effectiveness of monetary policy: empirical evidence from Turkey. Applied Economics Letters, 10(4), 217-221.
• Bhattacharya, R. (2014). Inflation dynamics and monetary policy transmission in Vietnam and emerging Asia. Journal of Asian Economics, 34, 16-26.
• Bozkurt, C. (2014). Money, inflation and growth relationship: The Turkish case. International Journal of Economics and Financial Issues, 4(2), 309-322.
• Bukhari, Z., & Yusof, Z. (2014). Macroeconomic effects of fiscal policy in Malaysia : Real or inflationary ? In Proc. of the Second Intl. Conf. on Advances in Social Science, Management and Human Behaviour (pp. 204-207). Zurich, Switzerland: Institute of Research Engineers and Doctors, USA.
• Burstein, A. T. (2006). Inflation and output dynamics with state-dependent pricing decisions. Journal of Monetary Economics, 53(7), 1235-1257.
• Deev, O., & Hodula, M. (2016). The long-run superneutrality of money revised : The extended European evidence. Review of Economic Perspectives, 16(3), 187-203.
• Dicky, D. ., & Fuller, W. A. (1981). The likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072.
• Domowitz, I., & Elbadawi, I. (1987). An error correction approach to money demand: A Case of Sudan. Journal of Development Economics, 26(2), 257-375.
• Duncan, R., & Martínez-García, E. (2015). Forecasting local inflation with global inflation : When economic theory meets the facts (Working Paper No. Working Paper No. 235). Federal Reserve Bank of Dallas, Dallas.
• Enders, W. (2010). Applied econometric time series (3rd Ed.). New York: John Wiley & Sons.
• Engle, R. F., & Granger, C. W. J. (1987). Cointegration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-76.
• Fakher, H. (2016). The empirical relationship between fiscal deficits and inflation (Case study: Selected Asian economies). Iranian Economic Review, 20(4), 551-579.
• Falahi, M., & Hajamini, M. (2017). Asymmetric behavior of inflation in Iran: New evidence on inflation persistence using a smooth transition model. Iranian Economic Review, 21(1), 101-120.
• Feridun, M., & Adebiyi, M. A. (2005). Forecasting inflation in developing economies: The case of Nigeria. International Journal of Applied Econometrics and Quantitative Studies, 2(4), 103-132.
• Fuddin, M. K. (2014). The effectiveness of monetary policy transmission in Indonesia. Economic Journal of Emerging Markets, 6(2), 119-130. http://doi.org/10.20885/ejem.vol6.iss2.art5
• Gali, J. (2010). Inflation pressures and monetary policy in a global economy. International Journal of Central Banking, 6(1), 93-102.
• Ghosh, A. (2014). How do openness and exchange-rate regimes affect inflation? International Review of Economics & Finance, 34, 190-202. http://doi.org/doi.org/10.1016/j.iref.2014.08.008
• Gupta, R., & Uwilingiye, J. (2008). Time aggregation, long-run money demand and the welfare cost of inflation (Department of Economics Working Paper Series No. 2008-25). Pretoria, South Africa.
• Hamilton, J. D. (2012). Import prices and inflation. International Journal of Central Banking, 8(1), 271-280.
• Hashem, H. Y. M. (2017). Inflation in Egypt : A fiscal or monetary phenomenon? Business and Economic Horizons, 13(4), 522-535. http://doi.org/dx.doi.org/10.15208/beh.2017.36
• Heidari, H., & Bashiri, S. (2010). Inflation and inflation uncertainty in Iran: An application of GARCH-in-mean model with FIML method of estimation. International Journal of Business and Development Studies, 2(1), 131-146.
• Hossain, A. (2005). The sources and dynamics of inflation in Indonesia: An ECM model estimation for 1952-2002. Applied Econometrics and International Development, 5(4), 93-116.
• Hossain, A. (2010). Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation. Journal of Asian Economics, 21(6), 564-578. http://doi.org/doi.org/10.1016/j.asieco.2010.07.003
• Insukindro, & Sahadewo, G. A. (2010). Inflation dynamics in Indonesia: Equilibrium correction and forward-looking Phillips curve approaches. Gadjah Mada International Journal of Business, 12(1), 117-133.
• Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580.
• Kandil, M. (2005). Money, interest, and prices: Some international evidence. International Review of Economics and Finance, 14(2), 129-147. http://doi.org/10.1016/j.iref.2003.11.013
• Khundrakpam, J. K. (2010). Fiscal stimulus and potential inflationary risks : An Empirical assessment of fiscal deficit and inflation relationship in India. Journal of Economic Integration, 25(4), 703-721. http://doi.org/doi.org/10.11130/jei.2010.25.4.703
• Lin, H. Y., & Chu, H. P. (2013). Are fiscal deficits inflationary. Journal of International Money and Finance, 32, 214-233. http://doi.org/dx.doi.org/10.1016/j.jimonfin.2012.04.006
• MacKinnon, J. G., Haug, A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563-577.
• Mohanty, D., & John, J. (2015). Determinants of inflation in India. Journal of Asian Economics, 36, 86-96. http://doi.org/10.1016/j.asieco.2014.08.002
• Naz, F., Mohsin, A., & Zaman, K. (2012). Exchange rate pass-through into inflation: New insights into the cointegration relationship from Pakistan. Economic Modelling, 29(6), 2205-2221.
• Nguyen, V. B. (2015). Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia. Journal of Economics, Finance and Administrative Science, 20(38), 1-5. http://doi.org/10.1016/j.jefas.2015.01.002
• Nikolaos, A., & Constantinos, K. (2013). A dynamic panel, empirical investigation on the link between inflation and fiscal Imbalances. Does heterogeneity matter? Prague Economic Papers, 2, 147-162.
• Phiri, A. (2013). An inquisition into bivariate threshold effects in the inflation-growth correlation : Evaluating South Africa’s macroeconomic objectives. Business and Economic Horizons, 9(3), 1-11. http://doi.org/dx.doi.org/10.15208/beh.2013.9
• Raji, J. O., Juzhar, J., & Jantan, M. D. (2014). Real money supply, price and fiscal deficit in Nigeria: Evidence from multivariate Granger causality tests. Journal of Economic Cooperation and Development, 4(4), 85-112.
• Thanh, S. D. (2015). Threshold effects of inflation on growth in the ASEAN-5 countries: A Panel smooth transition regression approach. Journal of Economics Finance and Administrative Science, 20(38), 41-48. http://doi.org/10.1016/j.jefas.2015.01.003
• Tirtosuharto, D., & Adiwilaga, H. (2013). Decentralization and regional inflation in Indonesia. Bulletin of Monetary, Economics and Banking, 16(2), 149-166.
• Yağcıbaşı, Ö. F., & Yıldırım, M. O. (2017). Welfare implications of alternative monetary policy rules : A new Keynesian DSGE model for Turkey. Review of Economic Perspectives, 17(4), 363-379. http://doi.org/10.1515/revecp-2017-0019