Base Money and Exchange Rate: Sources of Inflation in Indonesia during the Post-1997 Financial Crisis

Siregar, Reza Y.; Rajaguru, Gulasekaran

doi:2005.20.1.185

Journal of Economic Integration 2005 March;20(1) :185-215.
DOI: https://doi.org/10.11130/jei.2005.20.1.185

Base Money and Exchange Rate: Sources of Inflation in Indonesia during the Post-1997 Financial Crisis

Reza Y. Siregar, Gulasekaran Rajaguru

University of Adelaide, Australia
Bond University, Australia

ABSTRACT

The magnitude of the rise in inflation rate in Indonesia during the height of the 1997 financial crisis was among the sharpest that the East Asian economies has ever witnessed in the recent decades. This paper empirically tests the monetary hypotheses of inflation and compares and contrasts the sources of price changes during the pre- and post-1997 financial crisis. We find a high explanatory power of the monetary model for the post-crisis period, but not for the pre-crisis. The high volatilities of the local currency and the unprecedented rapid growth rate of base money during the post-crisis are found to be the two key monetary determinants of the inflation in the country.

JEL Classification: E41, E51, E52, E58, F41

Keywords: Inflation | Base Money | Expected Depreciation | Exchange Rate Policy | East Asian Financial Crisis

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