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Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis

Reza Anglingkusumo ()
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Reza Anglingkusumo: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank-Indonesia, Jakarta

No 05-054/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In this paper the effect of excess narrow money (MI) on C PI intlation in Indonesiabefore, during, and after the Asian crisis is empirically examined. The standard model for themonetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), isapplied and tested empirically using quarterly Indonesian data between 1981 and 2002. Theempirical model is a Markov switching error correction model. The results show that the tworegime P-star model, in terms of excess MI, tracks the long run dynamics of CPI inflation inIndonesia remarkably weIl. Hence, there is an empirical support for the assertion that longrun CPI intlation in Indonesia is a monetary phenomenon. In addition, there is evidence of aco-breaking relationship between excess MI and consumer prices in Indonesia during theAsian crisis.

Keywords: inflation; monetary model; structural break; regime switching error correction model; co-breaking; Asian crisis; Indonesia (search for similar items in EconPapers)
JEL-codes: C12 E31 (search for similar items in EconPapers)
Date: 2005-05-30
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Citations: View citations in EconPapers (1)

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