Decentralization and Regional Inflation in Indonesia

  • Darius Tirtosuharto
  • Handri Adiwilaga


The link between decentralization and inflation as one of the key aspects of macro economic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, previous study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF).


Keywords : Decentralization, Regional Inflation Convergence, Regional Institution

JEL Classification: E31, H73, R12


Alesina, Alberto and Allan Drazen, 1991. “Why Are Stabilizations layed?”, American Economic Review, 81: 1170-1188

Ball L and N Sheridan (2004), ‘Does inflation targeting matter?’, in BS Bernanke and M Woodford (eds), Inflation Targeting, University of Chicago Press, Chicago

Bardhan, P. (2002),’Decentralization of Governance and Development’, Journal of Economic Perspectives, 16 (4): 185-205.

Barro, R.J. & D.B. Gordon (1983), ‘Rules, Discretion and Reputation in A Model of Monetary Policy’, Journal of Monetary Economics, 12(1): 101-121.

Beck, G.W. and Weber, A.A., (2001), ‘How Wide are European Borders? New Evidence on the Integration Effects of Monetary Unions’, CFS Working Paper No: 2001/07

Brodjonegoro, B., (2004), ‘The Indonesian Decentralization After Law Revision: Toward A Better Future?’, Paper was presented at the International Symposium on Fiscal Decentralization in Asia Revisited, Tokyo, Japan.

Busetti F., L. Forni, A. Harvey and F. Venditti, 2007, Inflation Convergence and Divergence within the European Monetary Union, Working Paper No. 574, European Central Bank, January 2006

Campbell, et al. (1991), “Decentralization to Local Government in LAC: National Strategies and Local Repsonse in Planning, Spending, and Management,” Report No.5, Latin America and The Caribbean Technical Department, Regional Studies Program, World Bank, Washington.

Cliff, A.D. and J.K. Ord (1973), Spatial Autocorrelation, Pion.

European Central Bank (2003), ‘Inflation Differentials in The Euro Area: Potential Causes and Policy Implications’, Frankfurt am Main.

Feltenstein, A. and S. Iwata (2002), ‘Decentralization and Macroeconomic Performance in China: Regional Autonomy Has its Costs’, Manuscript, IMF.

Herrera, S. and G. Pang (2005), ‘Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach’, Working Paper Series No. 3645, World Bank.

Holmes (2002), ‘Panel data evidence on inflation convergence in the European Union’, Applied Economic Letters, Vol. 9

Honohan and Lane (2003), ‘Inflation Divergence’, Economic Policy, October Edition.

Hossain, A.A. (1996), Monetary and Financial Policies in Developing Countries: Growth and Stabilization, Routledge.

King, D. and Y. Ma (2001), “Fiscal Decentralization, Central Bank Independence and Inflation”, Economic Letters 72, 95-98.

Mohanty, M.S. and M. Klau (2001). ‘Fiscal Decentralization in Developing Countries: Is It Happening? How Do We Know?’, Bank for International Settlements Paper No. 8.

Neyapti, B. (2003), ‘Herrera, S. and G. Pang (2005), ‘Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach’, Working Paper Archive of the Department of Economics, Bilkent University.

Tirtosuharto, D. (2010),The Impact of Fiscal Decentralization and State Allocative Efficiency on Regional Growth in Indonesia’, Journal of International Commerce, Economics and Policy, 1 (2): 287-307.

Treisman, D. (2000), ‘Decentralization and Inflation: Commitment, Collective Action, or Continuity’, The American Political Science Review, 94(4): 837-857.

Vazquez, J.M. and R.M. McNab (2006), ‘Fiscal Decentralization, Macrostability, and Growth’, Revista de Economía Pública, 179(4): 25-49.

Wimanda, R.E. (2006), ‘Regional Inflation in Indonesia: Characteristic, Convergence, and Determinants’, Working Paper No. 13, Bank Indonesia.

Zsibók, Z. and B. Varga (2009). ‘Inflation Persistence in Hungary: a Spatial Analysis’, Department of Mathematical Economics and Economic Analysis, Corvinus Univ. of Budapest Working Paper No. 1203.
How to Cite
Tirtosuharto, D., & Adiwilaga, H. (2014). Decentralization and Regional Inflation in Indonesia. Buletin Ekonomi Moneter Dan Perbankan, 16(2), 137-154.

Most read articles by the same author(s)