Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis

  • Reza Anglingkusumo
  • Published 2005


In this paper the effect of excess narrow money (M1) on CPI inflation in Indonesia before, during, and after the Asian crisis is empirically examined. The standard model for the monetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), is applied and tested empirically using quarterly Indonesian data between 1981 and 2002. The empirical model is a Markov switching error correction model. The results show that the two regime P-star model, in terms of excess M1, tracks the long run dynamics of CPI inflation in Indonesia remarkably well. Hence, there is an empirical support for the assertion that long run CPI inflation in Indonesia is a monetary phenomenon. In addition, there is evidence of a co-breaking relationship between excess M1 and consumer prices in Indonesia during the Asian crisis. JEL classifications: E31, C12

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Cite this paper

@inproceedings{Anglingkusumo2005MoneyI, title={Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis}, author={Reza Anglingkusumo}, year={2005} }