Threshold effects of exchange rate depreciation and money growth on inflation

Rizki E. Wimanda

Journal of Economic Studies, 2014, vol. 41, issue 2, 196-215

Abstract: Purpose - – This paper aims to investigate the impact of exchange rate depreciation and money growth to the consumer price index (CPI) inflation in Indonesia. Design/methodology/approach - – Using threshold model applied to Phillips curve equation. Findings - – Using monthly data from 1980:1 to 2008:12, the econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effect of exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4 percent, theF-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While two threshold values are found for money growth, i.e. 7.1 and 9.8 percent, and they are statistically different. The impact on inflation is high when money grows by up to 7.1 percent, it is moderate when money grows by 7.1-9.8 percent, and it is low when money grows by above 9.8 percent. Research limitations/implications - – This research is using methodology proposed by Hansen which the threshold is based on the minimum SSR. The value of SSR will differ from one model to one model. For example, model using quarterly data will give the different result from that using monthly or yearly data. Also, when the author uses the new data, the result could be different. Practical implications - – Even though inflation targeting framework has been adopted by Bank Indonesia (BI) since 2005, BI should not disregard the monetary aggregate variable, especially M1. This is because the growth of money is still matter to influence inflation in the short run. The impact on inflation is found to be larger than the impact of exchange rate depreciation when it is below a certain threshold value. Originality/value - – This is the first paper that evaluates the threshold effect of exchange rate and money growth in emerging country, especially in Indonesia.

Keywords: Indonesia; Inflation; Threshold effect (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:v:41:y:2014:i:2:p:196-215

DOI: 10.1108/JES-02-2012-0011

Access Statistics for this article

Journal of Economic Studies is currently edited by Prof Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().