THE ROLE OF INTEREST RATES AND PROVINCIAL MONETARY AGGREGATE IN MAINTAINING INFLATION IN INDONESIA
Keywords:
Monetary policy, regional inflation, hybrid NKPC
Abstract
Monetary policy may employ interest rate or money supply to derive the assigned national inflatio target. In this manner, most studies investigate monetary policy effectiveness using national data. However, based n the idea that inflation is a regional phenomenon, the application of provincial data is more appropriate in explaining the relationship between monetary instrument and inflation. This study elaborates the impact of changes in provincial money supply, BI Rate (interest rates of central bank), and PUAB (money market interest rates) to regional inflation in Hybrid New Keynesian Phillips Curve (HNKPC) framework. This study employs Generalized Method of Moments (GMM) techniques on panel data of 32 provinces from 2005-III to 2013-III. The data is classified into 4 groups, which are Java-Bali (W1), Sumatera (W2), Kalimantan-Sulawesi (W3), and Papua-Maluku-Nusa Tenggara (W4). The estimation result shows that each monetary instrument has diverging effectiveness in different regions. Provincial monetary aggregate is only effective in Sumatera, while BI Rate can manage inflation in Sumatera and Kalimantan-Sulawesi. PUAB, on the other hand, is significantly affecting inflation in almost all Indonesian regions, except Kalimantan- Sulawesi. We conclude that interest rate (BI rate and PUAB) is a more appropriate instrument, compared to provincial monetary aggregate, to control provincial inflation in Indonesia.Downloads
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Princeton University Press. 1-57. United States of America.
Batini, N., and Nelson, E. “The Lag from Monetary Policy Actions to Inflation: Friedman Revisited”,
International Finance, 2001, 4(3), pp. 381-400.
Brzoza-Brzezina, Michal. (2002). The Relationship Between Real Interest Rates and Inflation.
National Bank of Poland Working Papers 23.
Calvo, Guillermo, A. (1983). Staggered Prices in Utility Maximizing Framework. Journal of
Monetary Economics. 12 (3), 383-398.
Carneiro, Fransisco, Divino, et al. (2002). Revisiting the Fisher Hypothesis for Cases Argentina,
Brazil and Mexico. Applied Economics Letters. 9, 95-98.
Chaban, M. and Voss, G. M. (2012). National and Provincial Inflation in Canada: Experiences
Under Inflation Targeting. Department of Economics University of Victoria Discussion Paper
No. DDP1201.
Clarida, R., Gali, J., and Gertler, M. “Monetary Policy Rules and Macroeconomic Stability:
Evidence and Some Theory”, Quarterly Journal of Economics, 2000, 115(1), pp. 147-180.
Fried, J, and Howitt, P. “The Effects of Inflation on Real Interest Rates”, The American Economic
Review, 1983, 73(5), pp. 968-980.
Gali, Jordi and Gertler, Mark. (1999). Inflation Dynamics: A Structural Econometric Analysis.
Journal of Monetary Economics. 44, 195-222.
Garcia, Marcio, G. P. (1993). The Fisher Effect in a Signal Extraction Framework: The Recent
Brazilian Experience. Journal of Development Economics. 41, 71-93.
Goto, Shingo and Torous, Walter. (2003). The Conquest of U.S. Inflation: Its Implications for
the Fisher Hypothesis and the Term Structure of Nominal Interest Rates. University of South
Carolina Working Paper.
Handa, Jagdish. (2009). Monetary Economics. Routledge, London and New York.
Lucas, R. E. “Two Illustrations of the Quantity Theory of Money”, The American Economic
Review, 1980, 70(5), pp. 1005-1014.
McCallum, Bennett, et al. (2010). Money and Inflation: Some Critical Issues. Finance and
Economics Discussion Series No. 2010-57.
Mehrotra, Aaron, Peltonen, et al. (2007). Modeling Inflation in China: A Regional Perspective.
European Central Bank Working Paper Series No. 829/November 2007.
Mishkin, Frederic, S. (1995). Symposium on the Monetary Transmission Mechanism. Journal of
Economic Perspectives. 9(4), 3-10.
Michell-Innes, Henry, A. (2006). The Relationship Between Interest Rates and Inflation in South
Africa: Revisiting Fisher’s Hyphotesis. Master Thesis, Rhodes University, South Africa.
Monnet, Cyril and Weber, Warren, E. (2001). Money and Interest Rates. Federal Reserve Bank
of Minneapolis Quarterly Review. 25(4), 2-13.
Phylaktis, Kate and Blake, David. (1993). The Fisher Hypothesis: Evidence From Three High
Inflation Economies. Weltwirtschaftliches Archiv. 129(3), 591-599.
Ridhwan, Masagus, M., De Groot, et al. (2011). The Regional Impact of Monetary Policy in
Indonesia. Tinbergen Institute Discussion Paper No. TI2011-081/3.
Shrestha, Keshab, Chen, et al. (2002). Are Expected Inflation Rates and Expected Real Rates
NegativeLy Correlated? A Long-run Test Of The Mundell-Tobin Hyphothesis. The Journal
of Financial Research. 25(3), 305-320.
Taylor, John, B. (1995). The Monetary Transmission Mechanism: An Empirical Framework.
Journal of Economic Perspective. 9(4), 11-26.
Woodford, Michael. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy.
Princeton University Press. 1-57. United States of America.
Published
2017-03-30
How to Cite
Utama, C., Wijaya, M., & Lim, C. (2017). THE ROLE OF INTEREST RATES AND PROVINCIAL MONETARY AGGREGATE IN MAINTAINING INFLATION IN INDONESIA. Buletin Ekonomi Moneter Dan Perbankan, 19(3), 267-286. https://doi.org/10.21098/bemp.v19i3.666
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
