THE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL

• Main Author: Rizki E. Wimanda
• Format: Article
• Language: Indonesian
• Published: Bank Indonesia 2011-06-01
• Series: Bulletin Ekonomi Moneter dan Perbankan
• Online Access: https://www.bmeb-bi.org/index.php/BEMP/article/view/399

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: Inflation, Threshold Effect; Indonesia