Is Asset Price Relevant in Constructing Monetary Conditions Index for Indonesia?

Wai-Ching Poon

The IUP Journal of Applied Economics, 2009, vol. VIII, issue 3-4, 72-83

Abstract: : This paper constructs the Monetary Conditions Index (MCI) over the quarterly period 1983:2-2004:4, using the bounds test approach proposed by Pesaran et al. (2001). The bounds test evidently reveals long-run relationship between the real GDP and its determinants, i.e., long-term interest rate, real exchange rate and share prices, which take into account the interest rate, exchange rate and asset price channels through which the monetary policy is transmitted. The paper also verifies the stability of the Indonesian output demand function that is used to construct the augmented MCI. It is observed that the monetary policy stance taken by the Bank Indonesia corresponds well to the movement of the augmented MCI after the Asian Financial Crisis.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjae:v:08:y:2009:i:3-4:p:72-83

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