The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

• Autorzy: Choi-Meng Leong , Chin Hong Puah , Venus Khim-Sen Liew
• Języki publikacji: EN

Abstrakty

EN

Stability of the exchange rate is critical for policy formulation in Indonesia and thus, has boosted the study of exchange rate behaviour. In this study, the monetary model of exchange rate has been utilised to determine the exchange rate for Indonesia. The model was improved by means of including the Divisia monetary aggregate as the money measure instead of conventional money supply. The ARDL approach, which was valid in spite of the variables' stationary properties, was used for the estimation. The findings indicated that monetary fundamentals are significant in explaining the exchange rate movements in Indonesia when Divisia money was incorporated into the monetary model of the exchange rate. As a result, monetary fundamentals can serve as the determinants of exchange rate in addition to non-monetary fundamentals in the case of Indonesia. High magnitude of the money supply differential and the real income differential coefficients also implied that monetary targeting can serve as a useful instrument for monetary policy in addition to inflation targeting. The research is based on the data ranging from 1984Q1 to 2017Q1.(original abstract)

Słowa kluczowe

EN

Exchange rates; Monetary policy

PL

Kurs walutowy; Polityka pieniężna

• Czasopismo: Economics & Sociology
• Rocznik: 2018
• Tom: 11
• Numer: nr 2
• Strony: 52--63

Twórcy

autor

Choi-Meng Leong

• UCSI University, Kuching, Malaysia

autor

Chin Hong Puah

• Universiti Malaysia Sarawak, Malaysia

autor

Venus Khim-Sen Liew

• Universiti Malaysia Sarawak, Kota Samarahan, Malaysia

Bibliografia

• Adawo, M. A., Effiong, E. L. (2014). Monetary Exchange Rate Model as a Long-run Phenomenon: Evidence from Nigeria. Journal of Applied Economics and Business Research, 4(1), 52-63.
• Ahmed, M. U., Muzib, M., Roy, A. (2013). Price-Wage Spiral in Bangladesh: Evidence from ARDL Bound Testing Approach. International Journal of Applied Economics, 10(2), 77-103.
• Akinlo, A. E. (2006). The Stability of Money Demand in Nigeria: An Autoregressive Distributed Lag Approach. Journal of Policy Modeling, 28(4), 445-452.
• Barnett, W. A. (1980). Economic Monetary Aggregates: An Application of Index Number and Aggregation Theory. Journal of Econometrics, 14, 11-48.
• Barnett, W. A., Bhadury, S., Ghosh, T. (2016). An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy. Open Economies Review, 27(5), 871-893.
• Barnett, W. A., Chang, H. K. (2011). Exchange Rate Determination from Monetary Fundamentals: An Aggregation Theoretic Approach. In: W. A. Barnett, & M. Chauvet (eds.), Aggregation and Index Number Theory (pp. 151-166). Toh Tuck Link: World Scientific Publishing.
• Belongia, M. T., Ireland, P. N. (2016). Money and Output: Friedman and Schwartz Revisited. Journal of Money, Credit and Banking, 48(6), 1223-1266.
• Berg, A. (1999). The Asia Crisis causes policy responses and outcomes. IMF Working Paper No. WP/99/138.
• Binner, J. M., Gazely, A. M., Chen, S.-H., Chie, B.-T. (2004). Financial Innovation and Divisia Money in Taiwan: Comparative Evidence from Neural and Vector Error-Correction Forecasting Models. Contemporary Economic Policy, 22, 213-224.
• Bissoondeeal, R. K., Binner, J. M., Elger, T. (2009). Monetary Models of Exchange Rates and Sweep Programs. Applied Financial Economics, 19(14), 1117-1129.
• Bunescu, L. (2014). The Impact of External Debt on Exchange Rate Variation in Romania. Economics and Sociology, 7(3), 104-115.
• Cabos, K., Funke, M., Siegfried, N. A. (2001). Some Thoughts on Monetary Targeting vs. Inflation Targeting. German Economic Review, 2(3), 219-238.
• Cao, Y., Ong, W. L. (1995). PPP and the Monetary Model of Exchange Rates Determination: The Case of Singapore. In: S. B. Chew, & J. D. Kendall (eds.), Regional Issues in Economics, 1. Nanyang Business School: Nanyang Technological University.
• Caruso, M. (2006). Stock Market Fluctuations and Money Demand in Italy, 1913-2003. Economic Notes, 35(1), 1-47.
• Civcir, I. (2004). The Long-run Validity of the Monetary Exchange Rate Model for a High Inflation Country and Misalignment: The Case of Turkey. Emerging Markets Finance and Trade, 40(4), 84-100.
• Dekle, R., Pradhan, M. (1997). Financial liberalization and money demand in ASEAN countries: Implications for monetary policy. IMF Working Paper No. WP/97/36.
• Duasa, J. (2007). Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach. Journal of Economic Cooperation, 28(3), 21-40.
• Evans, O. (2013). The Monetary Model of Exchange Rate in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach. MPRA Paper No.52457.
• Filardo, A., Ma, G., Mihaljek, D. (2011). Exchange Rates and Monetary Policy Frameworks in EMEs. Bank of International Settlements (BIS) Papers No. 57, 37-63.
• Frankel, J. A. (1979). On the mark: A theory of floating exchange rates based on real interest differential. American Economic Review, 69, 610-622.
• Gharleghi, B., Mohd Nor, A. H. S. (2012). Is Monetary Variable a Determinant in the Ringgit-Dollar Exchange Rate Model? A Cointegration Approach. Sains Malaysiana, 41(9), 1163-1169.
• Goeltom, M. S. (2008). The Transmission Mechanisms of Monetary Policy in Indonesia. Bank of International Settlements (BIS) Papers No. 35, 309-332.
• Goldfeld, S. M., Sichel, D. E. (1990). The Demand for Money. In: B. M. Friedman & F. H. Hahn (eds.), Handbook of Monetary Economics, 1 (pp. 300-355). Amsterdam: Elsevier Science Publishers.
• Güneş, S. Karul, Ç. (2016). The Exchange Rate Overshooting in Turkey. Pamukkale Journal of Eurasian Socioeconomic Studies, 3(1), 27-35.
• Haghighat, A., Shojaeu, T. (2014). Exchange Rate Overshooting in Iran. Academic Journal of Research in Economics & Management, 2(3), 38-43.
• Hendrickson, J. R. (2013). Redundancy or Mismeasurement: A Reappraisal of Money. Macroeconomic Dynamics, 18, 1437-1465.
• Hosein, S. R. (2007). Demand for money in Iran: An ARDL approach. MPRA Paper No. 8224.
• Hsieh, W.-J. (2009). Study of the behavior of the Indonesian Rupiah/US Dollar Exchange Rate and Policy Implications. International Journal of Applied Economics, 6(2), 41-50.
• Hwang, J. K. (2001). Dynamic Forecasting of Monetary Exchange Rate Models: Evidence from Cointegration. International Advances in Economic Research, 7(1), 51-64.
• Inoue, T., Toyoshima, Y., Hamori, S. (2012). Inflation Targeting in Korea, Indonesia, Thailand, and the Philippines: The Impact on Business Cycle Synchronization between Each Country and the World. Institute of Developing Economies Discussion Paper No. 328.
• International Monetary Fund, International Financial Statistics, various issues. Washington, D.C.: IMF.
• James, G. A. (2005). Money Demand and Financial Liberalization in Indonesia. Journal of Asian Economics, 16, 817-829.
• Johansen, S., Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration - With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistical, 52(2), 169-210.
• Kremers, J., Ericsson, N. Dolado, J. (1992). The Power of Cointegration Tests. Oxford Bulletin of Economics and Statistics, 54, 325-348.
• Lane, T. D. (1991). Empirical Models of Exchange Rate Determination: Picking Up the Pieces. Economia Internazionale, 44, 210-226.
• Lee, C., Azali, M., Masih, A. M. M. (2009). Tests of the Different Variants of Monetary Model in a Developing Economy: Malaysian Experience in the Pre- and Post-crisis Periods. Applied Economics, 41, 1893-1902.
• Leong, C. M., Puah, C. H., Shazali, A. M., Evan, L. P. H. (2010). Testing the Effectiveness of Monetary Policy in Malaysia Using Alternative Monetary Aggregation. Margin - The Journal of Applied Economic Research, 4(3), 321-338.
• Long, D., Samreth, S. (2008). The Monetary Model of Exchange Rate: Evidence from the Philippines Using ARDL Approach. Economics Bulletin, 6(31), 1-13.
• Majid, M. S. A. (2008). Does Financial Development Matter for Economic Growth in Malaysia? An ARDL Bound Testing Approach. Journal of Economic Cooperation, 29(1), 61-82.
• Marlissa, E. R. (2016). Effect of Deposit Interest Regional Development Bank, Deposit Interest Rate Government Bank, Inflation, GDP and Money Supply Against Exchange Rate US Dollar. Journal of Economics and Behavioral Studies, 8(1), 79-86.
• Miciuła, I. (2014). The Concept of FTS Analysis in Forecasting Trends of Exchange Rate Changes. Economics and Sociology, 7(2), 172-182.
• Miranti, R. (2010). Poverty in Indonesia 1984-2002: The Impact of Growth and Changes in Inequality. Bulletin of Indonesian Economic Studies, 46(1), 79-97.
• Narayan, P. K. (2005). The Saving and Investment Nexus for China: Evidence from Cointegration Tests. Applied Economics, Taylor and Francis Journals, 19(2), 245-261.
• Neely, C. J., Sarno, L. (2002). How Well do Monetary Fundamentals Forecast Exchange Rate? Federal Reserve Bank of St. Louis Review, September/October, 51-74.
• Pahlavani, M., Wilson, E., Worthington, A. C. (2005). Trade-GDP Nexus in Iran: An Application of the Autoregressive Distributed Lag (ARDL) Model. American Journal of Applied Sciences, 2(7), 1158-1165.
• Pesaran, H. M., Pesaran, B. (1997). Microfit 4.0, Oxford University Press, England.
• 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.
• Puah, C. H., Hiew, L C. (2010). Financial Liberalization, Weighted Monetary Aggregates and Money Demand in Indonesia. Labuan Bulletin of International Business & Finance, 8, 76-93.
• Sianturi, R. H., Tanjung, A. F., Leong, C. M., Puah, C. H., Brahmana, R. K. (2017). Financial Liberalization and Divisia Money Demand in Indonesia. Advanced Science Letters, 23(4), 3155-3158.
• Serletis, A., Gogas, P. (2014). Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions. Journal of Money, Credit and Banking, 46(1), 229-241.
• Simwaka, K. (2004). Monetary Model of Exchange Rate: Empirical Evidence from Malawi. Available at SSRN: http//dx.doi.org/10.2139/ssrn.569332
• Stern, J. (2003). The Rise and Fall of the Indonesian Economy. Kennedy School of Government, Harvard Faculty Research Working Paper Series No. RWP03-030.
• Tang, M. M.-J., Puah, C. H., Affendy Arip, M., Dayang Affizah, A. M. (2015). Forecasting Performance of the P-star Model: The Case of Indonesia. Journal of International Business and Economics, 15(2), 7-12.
• Taylor, M. P., Peel, D. A. (2000). Nonlinear Adjustment, Long-run Equilibrium and Exchange Rate Fundamentals. Journal of International Money and Finance, 19, 33-53.
• Warjiyo, P. (2013). Indonesia: Stabilizing the Exchange Rate along Its Fundamental. BIS Paper No. 73.
• Weliwita, A., Ekanayake, E. M. (1998). Demand for Money in Sri Lanka during the Post-1977 Period: A Cointegration and Error Correction Analysis. Applied Economics, 30, 1219-1229.

Identyfikatory

DOI

0.14254/2071-789X.2018/11-2/4