Open AccessTHE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL
Author(s) -
Rizki E. Wimanda
Publication year - 2011
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 4
ISSN - 2460-9196
DOI - 10.21098/bemp.v13i4.399
Subject(s) - economics , depreciation (economics) , inflation (cosmology) , monetary economics , exchange rate , money supply , value (mathematics) , hyperinflation , econometrics , monetary policy , macroeconomics , microeconomics , mathematics , statistics , profit (economics) , physics , financial capital , theoretical physics , capital formation
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