Inflation expectations formation and financial stability in Indonesia

Syurkani Ishak-Kasim and Abdullahi Ahmed

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Inflation expectations; Formation; Financial Stability; Indonesia (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 E61 G28 (search for similar items in EconPapers)
Date: 2009-09
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Published in The Empirical Economic Letters 9.8(2009): pp. 833-842

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