Observed inflation-target adjustments in an estimated DSGE model for Indonesia: Do they matter for aggregate fluctuations?
Denny Lie ()
No 2018-01, Working Papers from University of Sydney, School of Economics
This paper investigates the role of observed offcial inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Sto- chastic General Equilibrium (DSGE) model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counter- factual exercise shows that a gradual reduction in Bank Indonesia's inflation target may have not been optimal. The paper also provides additional insights on the con- tribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and risk-premium shocks, with inflation-target shocks playing a larger role in the longer run. The inclusion of inflation-target shocks in the model is also shown to improve the model's fit and out-of-sample predictive performance..
Keywords: Inflation target; inflation-target adjustments or shocks; DSGE model for Indonesia; source of aggregate fluctuations; Bank Indonesia (search for similar items in EconPapers)
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