LONG-RUN MONEY AND INFLATION NEUTRALITY TEST IN INDONESIA
Keywords:
long-run neutrality of money, inflation, unit root, exogeneity, cointegration
Abstract
This paper investigates long-run neutrality of money and inflation in Indonesia, with due consideration to the order of integration, exogeneity, and cointegration of the money stock-real output and the money stock-price, using annual time-series data. The Fisher-Seater methodology is used to do the task in this research. The empirical results indicate that evidence rejected the long-run neutrality of money (both defined as M1 and M2) with respect to real GDP, showing that it is inconsistent with the classical and neoclassical economics. However, the positive link between the money and price in long run holds for money defined as M1 rather than M2, which consistent with these theories. In particular, besides the positive effect to long-run inflation, monetary expansions have long-run positive effect on real output in the Indonesian economy.
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References
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Barro, R (1997), Macroeconomics, 5th edition, Canbridge, MA: MIT Press.
Boschen, J.F. and C.M. Otrok (1994), “Long-Run Neutrality and Superneutrality in an ARIMA Framework: Comment,” American Economic Review, 84: 1470-1473.
Browne, F. and D. Cronin (2007), “Commodity Prices, Money and Inflation,” ECB Working Paper Series, 738 (March): 1-33.
Chen, S.W. (2007), “Evidence of the Long-Run Neutrality of Money: the Case of South Korea and Taiwan,” Economics Bulletin, 64(3): 1-18.
Coe, P.J. and J.M. Nason (2004), “Long-Run Monetary Neutrality and Long-Horizon Regressions,” Journal of Applied Econometrics, 19 (3): 355-373
Dickey, D. and W.A. Fuller (1979), “Distribution of the Estimates for Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Society, 74: 427-431.
Dewald, W.G. (1998), “Historical U.S. Money Growth, Inflation, and Inflation Credibility,” Federal Reserve Bank of St. Louis Review, 80:13-24.
Dwyer, G.P. and R. W. Hafer (1999), “Are Money Growth and Inflation Still Related?”, Federal Reserve Bank of Atlanta Economic Review, Second Quarter: 32-43.
Engle, R.F. and C.W.J. Granger (1987), “Cointegration and Error Correction: Representation, Estimation and Testing,” In Engle R.F. and C.W.J. Granger (1991), Long-Run Economic Relationships: Readings in Cointegration, 81-111. New York: Oxford University Press.
Fisher, M.E and J.J. Seater (1993), “Long-Run Neutrality and Superneutrality in an ARIMA Framework,” American Economic Review, 83(3): 402-415.
Gujarati, D.N. and D.C. Porter (2009), Basic Econometrics, 5th Edition, New York: McGraw-Hill.
Hume, D. (1752), “Of Money, Of Interest, and Of the Balance of Trade,” In Essays, Moral, Political, and Literary, Reprinted in Hume, 1955, Writings on Economics, Eugene
Rotwein ed. Diakses dari http://www.econlib.org/library/LFBooks/Hume/hmMPL.html
Johansen, S. (1995), Likelihood-based Inference in Cointegrated Vector Autoregressive Models, New York: Oxford University Press.
King, R.G. and M.W. Watson (1997), “Testing Long-Run Neutrality,” Federal Reserve Bank of ichmond Economic Quarterly, 83(3): 69-101.
Lucas, R.E. (1972), “Expectations and the Neutrality of Money,” Journal of Economic Theory, 4(2): 103-124.
__________ (1980), “Two Illustrations of the Quantity Theory of Money,” American Economic Review, 70: 1005-1014.
___________(1995), “Monetary Neutrality. Prize Lecture,” December 7, 1995. Diakses dari http://nobelprize.org/economics/laureates/1995/lucas-lecture.pdf.
McCandless, G.T., Jr. and W.E. Weber (1995), “Some Monetary Facts,” Federal Reserve Bank of Minneapolis Quarterly Review, 19(3): 1-11.
Noriega, A.E (2004), Long-Run Monetary Neutrality and the Unit-Root Hypothesis: Further International Evidence, North American Journal of Economics and Finance, 15(2): 179-197.
Noriega, A.E., L.M. Soria and R. Velazquez (2005), “International Evidence on Monetary Neutrality under Broken Trend Stationary Models,” Mimeo. Diakses dari http://repec.org/esLATM04/up.7482.1080751251.pdf
Oi, H., S. Shiratsuka, and T. Shirota (2004), “On Long-Run Monetary Neutrality in Japan, Monetary and Economic Studies”, 22(3): 79 - 113
Olekalns, N. (1996), “Some Further Evidence on the Long-Run Neutrality of Money,” Economics Letters, 50(3): 393-98.
Phillips, P.C.B., and P. Perron (1988), “Testing for a Unit Root in Time Series Regression”, Biometrika, 75(2): 335-346.
Puah, C.H., M.S. Habibullah and S.A. Mansor (2008), “On the Long-Run Monetary Neutrality: Evidence from the SEACEN Countries,” Journal of Money, Investment and Banking, Issue 2: 50-62.
Ran, J. (2005), Is There Long-Run Money Neutrality under Different Exchange Rate Regimes?,Pacific Economic Review, 10(3): 361-370.
Roffia, B. and A. Zaghini (2007), Excess Money Growth and Inflation Dynamics, ECB Working Paper Series, 749: 1-40.
Romer, D. (2001), Advanced Macroeconomics, Second Edition, New York: McGraw-Hill.
Rolnick, A.J. and W.E. Weber (1997), Inflation, Money, and Output under Alternative Monetary Standards, Federal Reserve Bank of Minneapolis Research Department, Staff Report 175.
Saatcioglu, C. and L. Korap (2009), The Search for Co-Integration Between Money, Prices and Income: Low Frequency Evidence from the Turkish Economy, Panoeconomicus, 1: 55-72.
Serletis, A. and Z. Koustas (1998), “International Evidence on the Neutrality of Money,” Journal of Money, Credit and Banking, 30 (1): 1-25. Long-Run Money and Inflation Neutrality Test in Indonesia 99
___________ and ___________(2001), “Monetary Aggregation and the Neutrality of Money,” Economic Inquiry, 39 (1): 124√138. Diakses dari http://econpapers.repec.org/article/oupecinqu/
Shelley, G.L. and F.H. Wallace (2003), “Testing for Long Run Neutrality of Money in Mexico”,Diakses dari http://129.3.20.41/eps/mac/papers/0402/0402003.pdf
Wallace, F.H. and L.F. Cabrera-Castellanos (2006), “Long Run Money Neutrality in Guatemala”, MPRA Paper 4025, University Library of Munich, Germany, revised 2006. Diakses dari http://129.3.20.41/eps/mac/papers/
Published
2011-12-07
How to Cite
Arintoko, A. (2011). LONG-RUN MONEY AND INFLATION NEUTRALITY TEST IN INDONESIA. Buletin Ekonomi Moneter Dan Perbankan, 14(1), 75-99. https://doi.org/10.21098/bemp.v14i1.79
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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.
