The link between decentralization and inflation as one of the key aspects of macroeconomic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, the study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF).
The link between decentralization and inflation as one of the key aspects of macro economic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, previous study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF). Keywords : Decentralization, Regional Inflation Convergence, Regional InstitutionJEL Classification: E31, H73, R12
This paper analyzes the economic condition of the second quarter of 2017 and provides the outlookfor 2017 and 2018. It covers the global dynamics and domestic in national level as well as spatial views inIndonesia. From external, global economic expansion continues, entailing a shift in the sources of growthwith China and Europe was expected to increase, while US economy grew slower than expected. At home,Indonesia’s economic growth was stable on the back of gain in investment particularly building investment.On the other hand, household consumption growth slowed, government consumption contracted afterspending was delayed, and exports posted slower growth. Spatially, the slowdown occurred in Java,Sulawesi and Kalimantan. CPI inflation was maintained within the target range despite increasing demandduring the lead up to national religious holidays. Balance of payments recorded a surplus while currentaccount deficit remains well maintained and financed by a large surplus in the capital and financial account..The rupiah rate moved steadily, with lower volatility relative to peer countries. The Banking industry waswell maintained and continued to strengthen financial system stability. The continued easing of monetarypolicy was responded by declining rates on deposits and loans. Moving forward, Bank Indonesia expectseconomic growth to accelerate in 2017, and grow higher in 2018 on the back of increased investmentand consumption in line with more expansive government spending along with space to ease monetarypolicy. On the other hand, inflationary pressures will be controlled in line with the lower inflation target.
Globally, the economy continues to recover. The economic growth in AS increases supported by solid consumption and increase on non-residential investment, as well as the economy of Tiongkok, supported by private investment and better export performance. European economy also better off with stronger consumption and export, and the reduction of geopolitical risk post the presidential election in France. The economy in Japan also increases supported by stronger domestic and export demand. This global trend supports the growth in Indonesia that rises to the level of 5,01% (yoy), with the pillars of exportperformance, better global demand and commodity prices, as well as higher government expenditure – particularly on investment – and the household consumption. Spatially, the national growth was mainly from Java and Kalimantan due to their better export performance. Inflation increases slightly particularly related to price regulation implemented in early 2017. Spatially, inflation occurs in most area except Sumatera who recorded deflation. The balance of payment recorded a surplus arisen from financial and capital surplus of 7.9 milliard dolar AS. However, the current account recorded deficit due to the deficit of oil trade balance and primary income. The reserve increases to 121.8 miliar dolar AS, accompanied with stronger Rupiah with lower volatility relative to peer countries. Following the monetary ease on previous Quarter IV, 2016, the monetary transmission is better yet not optimal due to the prudent practice of the bank on allocating credit. The interest rate decreases reflected on daily PUAB O/N reduction by 7 point to 4.23%. The deposit rate also decreases as well as the lending rate with larger decrease. Lookingforward, the growth in 2017 will be higher than 2016 on the range of 5.0 – 5.4%, while inflation will be around the target of 4 + 1%. We need to anticipate the impact of Fed Fund Rate increase, the lower of FED balance, and the trade and fiscal US policy, as well as the geopolitical dynamics across regions particularly in Korean Bay. Bank Indonesia will keep strengthening his policy mix and macroprudential, and his coordination with the government to ensure the inflation control, greater stimulus for growth, and the implementation of structural reform run on the right track, and hence preserve the sustainable economic development.
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