Monetary Policy and the Causality Between Inflation and Money Supply in Indonesia

Abstract

Conceptually and empirically, inflation volatility in Indonesia is a monetary and fiscal phenomenon. This study focuses on the macroeconomic policy and public policy especially causality between two variables namely inflation and money supply in Indonesia. This study uses Indonesian macroeconomic data of inflation and money supply from the Bank of Indonesia publication during 2007.1–2017.7. Inflation is measured by the consumer price index, reflects the annual percentage change in costs of acquiring a basket of goods and services to the average consumers that may change at specified intervals. Meanwhile, money supply is measured by the currency, demand deposits, time deposits, and saving deposits. Methodically, this study uses the Granger Causality model to determine the causality between inflation and money supply. The results show that there is a one-way causality between inflation and money supply in Indonesia. These findings imply that money supply causes inflation, but not vice versa. This condition implies that the role of Indonesian Government and Bank of Indonesia were very crucial in managing and controlling macroeconomic policy and public policy. Then, analysis of money supply and inflation also related to impacting factors such as money laundering, role of banks, taxation, tax evasion, and corruption.

The causality between inflation and unemployment: the Indonesian evidence

“…One of the likely factors of this condition is the government' various economic rescue programs such as the tight money or contractive policy that was effective in taming the inflation rate. Besides, the Inflation Targeting Framework that was implemented by Bank Indonesia (the Indonesian central bank) since July 2005 (Bank Indonesia 2017) and the empowerment of the Regional Inflation Monitoring Team in each local region facilitated further the inflation control (Sasongko and Huruta 2018).…”

The Causality of BI Rate and Federal Fund Rate

“…However, Indonesia's lack of participation in the GVC turned out to make Indonesia experienced no impact. In other words, the absence of causality between the BI Rate and the Federal Fund Rate might occur because the Indonesian currency (Rupiah) was very rarely used as a reference by other countries, so that all forms of economic policy in Indonesia (specifically interest rates) could only affect economic con- In addition to gross domestic product and lack of Indonesian participation in GVC, money supply, and inflation were also able to cause movement in domestic interest rates (Caporale & Pittis, 1997;Duburcq & Girardin, 2010;Sasongko & Huruta, 2018). This can be seen in Figure 3.…”

“…Meanwhile, the existence of expansionary monetary policy through the addition of foreign exchange into the money market accelerated bank lending and an increase in net foreign assets increased the money supply (Sasongko & Huruta, 2018). Theoretically, an increase in the money supply causes a decrease in interest rates, then make the LM (Liquidity and Money) curve shift to the right.…”

“…Interest rates are not only related to the monetary sector but also with the real sector, the employment and foreign sectors (Clarida, Gali & Gertler, 1998;Adam, Cobham, & Girardin, 2005;Barassi, Caporale, & Hall, 2005;Touny, 2013). Since July 2005, the monetary policy set by Bank Indonesia (BI) has been carried out through controlling interest rates (Bank Indonesia, 2017c;Sasongko & Huruta, 2018). In the same year, in June 2005, Egypt also implemented monetary policy (Touny, 2013) as what had been done by Indonesia.…”

Analysis of Monetary Policy, Capital, Saving, FDI, and Economic Development for High and Middle Income Economies with ARDL Approach

“…GDP behaved insignificantly against money supply and inflation rate whereas interest rate and exchange rate have a significant influence on GDP. Sasongko and Huruta (2018) showed that there is a one-way causality between money supply and inflation in Indonesia. Denbel et al (2016) disclosed that economic growth affected by the change of money supply and inflation based on the VECM approach.…”