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

Abstract: 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)
Date: 2018-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Observed Inflation‐target Adjustments in an Estimated DSGE Model for Indonesia: Do They Matter for Aggregate Fluctuations? (2019)
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