THE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL
Keywords:
Inflation, Threshold Effect, Indonesia
Abstract
This paper investigates the impact of exchange rate depreciation and money growth to the CPI inflation in Indonesia. Using monthly data from 1980:1 to 2008:12, our econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effectof exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4%, the F-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While, two threshold values are found for money growth, i.e. 7.1% and 9.8%, and they are statistically different. The impact on inflation is high when money grows by up to 7.1%, it is moderate when money grows by 7.1% to 9.8%, and it is low when money grows by above 9.8%.
JEL Classification: C22; E31; E51.
Keywbords: , ;
Downloads
Download data is not yet available.
References
Alba, J. D., Papell, D. (1998), “Exchange Rate Determination and Inflation in Southeast Asian Countries”, Journal of Development Economics, 55(2), 421-437.
Arestis, P., Cipollini, A., Fattouh, B. (2004), “Threshold Effect in the U.S. Budget Deficit”, Economic Inquiry, 42(2), 214-222.
Bai, J. (1997), “Estimating Multiple Breaks One at a Time”, Econometric Theory, 13, 315-52.
Bajo-Rubio, O., Diaz-Roldan, C., Esteve, V. (2004), “Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case”, Economics Letters, 82, 239-243.
Barro, R. J. (1993), Macroeconomics, 4th edition, New York: Wiley
Bernhofen, D. M., Xu, P. (2000), “Exchange Rates and Market Power: Evidence from the Petrochemical Industry”, Journal of International Economics, 52, 283-297.
Calvo, G. A., Reinhart, C. M. (2000), “Fixing for Your Life”, NBER Working Paper, 8006.
Campa, J. M., Goldberg, L. S. (2005), “Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?”, Review of Economics and Statistics, 87(4), 679-690.
Chong, T.T.L. (1994), “Consistency of Change-Point Estimators when the Number of ChangePoints in Structural Change Models is Underspecified”, Working Paper, Chinese University of Hong Kong.
Choudhri, E. U., Hakura, D. S. (2006), “Exchange Rate Pass-through to Domestic Prices: Does the Inflationary Environment Matter?”, Journal of International Money and Finance, 25, 614-639.
De Grauwe, P., Poland, M. (2005), “Is Inflation always and Everywhere a Monetary Phenomenon?”, Scandinavia Journal of Economics, 107(2), 239-259.
Dewald, W. G. (1998), “Money Still Matters», Federal Reserve Bank of St. Louis Review, 80, 13-24.
Dwyer, G. P., Hafer, R. W. (1988), “Is Money Irrelevant?”, Federal Reserve Bank of St. Louis Review, (May/June), 3-17.
Dwyer, G. P., Hafer, R. W. (1999), “Are Money Growth and Inflation Still Related?”, Economic Review, Federal Reserve Bank of Atlanta, Second Quarter.
Foster, N. (2006), “Export, Growth and Threshold Effects in Africa”, Journal of Development Studies, 42(6), 1056-1074
Friedman, M. (1968), “The Role of Monetary Policy”, American Economic Review, 58(1): 1-17.
Friedman, M. (1992), Money Mischief: Episodes in Monetary History, New York: Harcourt Brace Jovanovich
Galbraith, J.W. (1996), “Credit Rationing and Threshold Effects in the Relation between Money and Output”, Journal of Applied Econometrics, 11(4), 419-429.
Goldberg, P. K. (1995), “Product Differentiation and Oligopoly in International Markets: the Case of the U.S. Automobile Industry”, Econometrica, 63(4), 891-951.
Goldberg, P. K., Knetter, M. (1997), “Goods Prices and Exchange Rates: What Have We Learned?”, Journal of Economic Literature, 35, 1243-1272.
Lucas, R. E. (1980), “Two Illustrations of the Quantity Theory of Money”, American Economic Review, 70, 1005-14.
Hansen, B.E. (1997), “Inference in TAR Models”, Studies in Nonlinear Dynamics and Econometrics, 2(1), 1-14.
Hansen, B.E. (2000), “Sample Splitting and Threshold Estimation”, Econometrica, 68(3).
Hooper, P., Mann, C. L. (1989), “Exchange Rate Pass-Through in the 1980s: the Case of U.S. Imports of Manufactures”, Brookings Papers of Economic Activity, 1.
Khan, M. S., Senhadji, A.S. (2001), “Threshold Effect in the Relation between Inflation and Growth”, IMF Staff Paper, 48(1).
McCandless, G. T., Weber, W. E. (1995), “Some Monetary Facts”, Federal Reserve Bank of Minneapolis Quarterly Review, 19(3), 2-11.
McCarthy, J. (2000), “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies”, Federal Reserve Bank of New York Staff Report, 3.
Menon, J. (1995), “Exchange Rate Pass-Through”, Journal of Economic Surveys,9(2), 197-231.
Papageorgiou, C. (2002), “Trade as Threshold Variable for Multiple Regimes”, Economics Letters, 77, 85-91.
Papell, D. H. (1994), “Exchange Rates and Prices: An Empirical Analysis”, International Economic Review, 35(2), 397-410.
Rolnick, A. J., Weber, W. E. (1997), “Money, Inflation, and Output under Fiat and Commodity Standards”, Journal of Political Economy, 105(6): 1308-21.
Wimanda, R.E. (2010), “Inflation and Monetary Policy Rules: Evidence from Indonesia”, Doctoral Thesis, Loughborough University.
Arestis, P., Cipollini, A., Fattouh, B. (2004), “Threshold Effect in the U.S. Budget Deficit”, Economic Inquiry, 42(2), 214-222.
Bai, J. (1997), “Estimating Multiple Breaks One at a Time”, Econometric Theory, 13, 315-52.
Bajo-Rubio, O., Diaz-Roldan, C., Esteve, V. (2004), “Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case”, Economics Letters, 82, 239-243.
Barro, R. J. (1993), Macroeconomics, 4th edition, New York: Wiley
Bernhofen, D. M., Xu, P. (2000), “Exchange Rates and Market Power: Evidence from the Petrochemical Industry”, Journal of International Economics, 52, 283-297.
Calvo, G. A., Reinhart, C. M. (2000), “Fixing for Your Life”, NBER Working Paper, 8006.
Campa, J. M., Goldberg, L. S. (2005), “Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?”, Review of Economics and Statistics, 87(4), 679-690.
Chong, T.T.L. (1994), “Consistency of Change-Point Estimators when the Number of ChangePoints in Structural Change Models is Underspecified”, Working Paper, Chinese University of Hong Kong.
Choudhri, E. U., Hakura, D. S. (2006), “Exchange Rate Pass-through to Domestic Prices: Does the Inflationary Environment Matter?”, Journal of International Money and Finance, 25, 614-639.
De Grauwe, P., Poland, M. (2005), “Is Inflation always and Everywhere a Monetary Phenomenon?”, Scandinavia Journal of Economics, 107(2), 239-259.
Dewald, W. G. (1998), “Money Still Matters», Federal Reserve Bank of St. Louis Review, 80, 13-24.
Dwyer, G. P., Hafer, R. W. (1988), “Is Money Irrelevant?”, Federal Reserve Bank of St. Louis Review, (May/June), 3-17.
Dwyer, G. P., Hafer, R. W. (1999), “Are Money Growth and Inflation Still Related?”, Economic Review, Federal Reserve Bank of Atlanta, Second Quarter.
Foster, N. (2006), “Export, Growth and Threshold Effects in Africa”, Journal of Development Studies, 42(6), 1056-1074
Friedman, M. (1968), “The Role of Monetary Policy”, American Economic Review, 58(1): 1-17.
Friedman, M. (1992), Money Mischief: Episodes in Monetary History, New York: Harcourt Brace Jovanovich
Galbraith, J.W. (1996), “Credit Rationing and Threshold Effects in the Relation between Money and Output”, Journal of Applied Econometrics, 11(4), 419-429.
Goldberg, P. K. (1995), “Product Differentiation and Oligopoly in International Markets: the Case of the U.S. Automobile Industry”, Econometrica, 63(4), 891-951.
Goldberg, P. K., Knetter, M. (1997), “Goods Prices and Exchange Rates: What Have We Learned?”, Journal of Economic Literature, 35, 1243-1272.
Lucas, R. E. (1980), “Two Illustrations of the Quantity Theory of Money”, American Economic Review, 70, 1005-14.
Hansen, B.E. (1997), “Inference in TAR Models”, Studies in Nonlinear Dynamics and Econometrics, 2(1), 1-14.
Hansen, B.E. (2000), “Sample Splitting and Threshold Estimation”, Econometrica, 68(3).
Hooper, P., Mann, C. L. (1989), “Exchange Rate Pass-Through in the 1980s: the Case of U.S. Imports of Manufactures”, Brookings Papers of Economic Activity, 1.
Khan, M. S., Senhadji, A.S. (2001), “Threshold Effect in the Relation between Inflation and Growth”, IMF Staff Paper, 48(1).
McCandless, G. T., Weber, W. E. (1995), “Some Monetary Facts”, Federal Reserve Bank of Minneapolis Quarterly Review, 19(3), 2-11.
McCarthy, J. (2000), “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies”, Federal Reserve Bank of New York Staff Report, 3.
Menon, J. (1995), “Exchange Rate Pass-Through”, Journal of Economic Surveys,9(2), 197-231.
Papageorgiou, C. (2002), “Trade as Threshold Variable for Multiple Regimes”, Economics Letters, 77, 85-91.
Papell, D. H. (1994), “Exchange Rates and Prices: An Empirical Analysis”, International Economic Review, 35(2), 397-410.
Rolnick, A. J., Weber, W. E. (1997), “Money, Inflation, and Output under Fiat and Commodity Standards”, Journal of Political Economy, 105(6): 1308-21.
Wimanda, R.E. (2010), “Inflation and Monetary Policy Rules: Evidence from Indonesia”, Doctoral Thesis, Loughborough University.
Published
2011-06-28
How to Cite
Wimanda, R. E. (2011). THE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL. Buletin Ekonomi Moneter Dan Perbankan, 13(4), 391-414. https://doi.org/10.21098/bemp.v13i4.399
Issue
Section
Articles
Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
