Price stabilization policy in an emerging economy: An asymmetric approach
|Title:||Price stabilization policy in an emerging economy: An asymmetric approach|
Vol. 12, No 2, 2019
Published date: 05-2019 (print) / 05-2019 (online)
Journal of International Studies
ISSN: 2071-8330, eISSN: 2306-3483
Department of Economics, Islamic University of Indonesia, Indonesia
|Keywords:||asymmetric effect, exchange rate, fiscal policy, inflation, monetary policy|
|JEL classification:||C53, E62, E63|
|The author would like to thank the Center of Economics Studies, Department of Economics, Islamic University of Indonesia for providing the fund for this research under the scheme of Applied Research Grant No. 7/Dir.PPE/II/2018.|
Price stabilization has been an important issue for Indonesian monetary authority for decades. Relatively high inflation rates in the recent years following a series of financial crises have characterized Indonesian economy. The aim of this paper is to investigate the determinants of inflation dynamics based on the annual data for the period of 1970-2017. The nonlinear autoregressive distributed lag (NARDL) model is applied to identify the dynamic effects of government expenditure, money supply, and exchange rate on the inflation rate. The research finds that the mentioned variables significantly affect the inflation rate. Moreover, the dynamic effects of these variables on the inflation rate are asymmetric in the long run. Positive changes in government expenditure and money supply have a long-run impact on the increase of inflation rate. The increase in inflation rate is also associated with currency depreciation. The international financial market dynamics affects the inflation rate in the country through asymmetric effects of exchange rate volatility. This paper also highlights that government expenditure and money supply are effective instruments for price stabilization, with their asymmetric effects taken into consideration. The evidence of the short-run symmetric impact from those variables implies that fiscal and monetary authorities should have a quick response to the price stabilization.
1. Ajaz, T., Nain, M. Z., & Kamaiah, B. (2016). Inflation and openness in India: an asymmetric approach. Macroeconomics and Finance in Emerging Market Economies, 9(2), 190-203. doi:10.1080/17520843.2016.1162825
2. Berument, H., & Dogan, B. (2003). Openness and the effectiveness of monetary policy: empirical evidence from Turkey. Applied Economics Letters, 10(4), 217-221. doi:10.1080/1350485022000015842
3. Bhattacharya, R. (2014). Inflation dynamics and monetary policy transmission in Vietnam and emerging Asia. Journal of Asian Economics, 34, 16-26. doi:10.1016/j.asieco.2014.05.001
4. Bozkurt, C. (2014). Money, inflation and growth relationship: The Turkish case. International Journal of Economics and Financial Issues, 4(2), 309-322.
5. Fakher, H. (2016). The empirical relationship between fiscal deficits and inflation (Case study: Selected Asian economies). Iranian Economic Review, 20(4), 551-579.
6. Falahi, M. A., & Hajamini, M. (2017). Asymmetric behavior of inflation in Iran: new evidence on inflation persistence using a smooth transition model. Iranian Economic Review, 21(1), 101-120. doi:10.1684/MRH.2014.0363
7. Findreng, J. H. (2014). Relative purchasing power parity and the European monetary union: evidence from eastern Europe. Economics and Sociology, 7(1), 22-38. doi:10.14254/2071-789X.2014/7-1/3
8. Gali, J. (2010). Inflation pressures and monetary policy in a global economy. International Journal of Central Banking, 6(1), 93-102.
9. Ghosh, A. (2014). How do openness and exchange-rate regimes affect inflation? International Review of Economics & Finance, 34, 190-202. doi:10.1016/j.iref.2014.08.008
10. Güney, P. Ö. (2018). Asymmetries in monetary policy reaction function and the role of uncertainties: the case of Turkey. Economic Research-Ekonomska Istrazivanja, 31(1), 1367-1381. doi:10.1080/1331677X.2018.1481445
11. Halka, A., & Szafranski, G. (2018). What common factors are driving inflation in cee countries? Prague Economic Papers, 27(2), 131-148.
12. Hamilton, J. D. (2012). Import prices and inflation. International Journal of Central Banking, 8(1), 271-280.
13. Hashem, H. Y. M. (2018). Inflation in Egypt: a fiscal or monetary phenomenon? Business and Economic Horizons, 13(4), 522-535. doi:10.15208/beh.2017.36
14. Hossain, A. (2005). The sources and dynamics of inflation in Indonesia: An ECM model estimation for 1952-2002. Applied Econometrics and International Development, 5(4), 93-116.
15. Insukindro, & Sahadewo, G. A. (2010). Inflation dynamics in Indonesia: equilibrium correction and forward-looking Phillips curve approaches. Gadjah Mada International Journal of Business, 12(1), 117-133.
16. Khundrakpam, J. K., & Pattanaik, S. (2010). Fiscal stimulus and potential inflationary risks: an empirical assessment of fiscal deficit and inflation relationship in India. Journal of Economic Integration, 25(4), 703-721.
17. Kumar, S. (2015). Inflation, uncertainty and monetary policy in India: a regime-switching analysis. Economics Bulletin, 35(4), 2213-2219.
18. Lakić, S., & Šehović, D. (2016). An analysis of the official dollarization regime in Montenegro: theoretical approaches and empirical evidence. Journal of International Studies, 9(2), 48-64. doi:10.14254/2071-8330.2016/9-2/3
19. Meyer, D. F., Sanusi, K. A., & Hassan, A. (2018). Analysis of the asymmetric impacts of oil prices on food prices in oil-exporting developing countries. Journal of International Studies, 11(3), 82-94. doi:10.14254/2071-8330.2018/11-3/7
20. Mohanty, D., & John, J. (2015). Determinants of inflation in India. Journal of Asian Economics, 36, 86-96. doi:10.1016/j.asieco.2014.08.002
21. Nguyen, V. B. (2015). Effects of fiscal deficit and money M2 supply on inflation: evidence from selected economies of Asia. Journal of Economics, Finance and Administrative Science, 20, 49-53. doi:10.1016/j.jefas.2015.01.002
22. Nikolaos, A., & Constantinos, K. (2013). A dynamic panel, empirical investigation on the link between inflation and fiscal Imbalances. Does heterogeneity matter? Prague Economic Papers, 2, 147-162.
23. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. doi:10.1002/(ISSN)1099-1255
24. Raji, J. O., Juzhar, J., & Jantan, M. D. (2014). Real money supply, price and fiscal deficit in Nigeria: Evidence from multivariate Granger causality tests. Journal of Economic Cooperation and Development, 4(4), 85-112.
25. Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modeling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. (W. C. Horrace & R. C. Sickles, Eds.)In Festschrift in Honor of Peter Schmidt. New York: Springer.
26. Tran, N. (2018). Asymmetric effects of fiscal balance on monetary variables: evidence from large emerging economies. Empirical Economics, (November), 1-32. doi:10.1007/s00181-018-1483-y
27. Zwolankowski, M. (2013). The financial crisis, financial system instability and monetary transmission mechanism. Journal of International Studies, 4(1), 26-32. doi:10.14254/2071-8330.2011/4-1/3