Is money targeting an option for Bank Indonesia?

Narayan, Paresh 2007, Is money targeting an option for Bank Indonesia?, Journal of Asian economics, vol. 18, no. 5, pp. 726-738.

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Title Is money targeting an option for Bank Indonesia?
Author(s) Narayan, Paresh
Journal name Journal of Asian economics
Volume number 18
Issue number 5
Start page 726
End page 738
Publisher Elsevier B.V.
Place of publication Amsterdam, The Netherlands
Publication date 2007-10
ISSN 1049-0078
1873-7927
Keyword(s) money demand function
cash-in-advance model
cointegration
Granger causality
Summary In this paper, using the cash-in-advance model, we estimate Indonesia's money demand function for the period 1970–2005. We find the real M1 and real M2 are cointegrated with their determinants, namely real income, real exchange rate and short-term domestic and foreign interest rates. The long-run elasticities, except for the relationship between M2 and domestic interest rate, are plausible. Interestingly, we find a negative relationship between real exchange rate and real money demand, suggesting evidence of currency substitution. We test for causal relationships and find that in the short-run only the real exchange rate Granger causes real M1 and real M2. Finally, we find that Indonesia's money demand functions are unstable. We conclude that money targeting is not an option for Bank Indonesian and that currency substitution should be curbed in order to ensure macroeconomic sustainability.
Language eng
Field of Research 140305 Time-Series Analysis
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2007, Elsevier B.V.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30007774

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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