PRICE STABILIZATION POLICY IN AN EMERGING ECONOMY: AN ASYMMETRIC APPROACH
PRICE STABILIZATION POLICY IN AN EMERGING ECONOMY: AN ASYMMETRIC APPROACH

Summary/Abstract: Price stabilization has been an important issue for Indonesian monetary authority for decades. Relatively high inflation rates in the recent years following a series of financial crises have characterized Indonesian economy. The aim of this paper is to investigate the determinants of inflation dynamics based on the annual data for the period of 1970-2017. The nonlinear autoregressive distributed lag (NARDL) model is applied to identify the dynamic effects of government expenditure, money supply, and exchange rate on the inflation rate. The research finds that the mentioned variables significantly affect the inflation rate. Moreover, the dynamic effects of these variables on the inflation rate are asymmetric in the long run. Positive changes in government expenditure and money supply have a long-run impact on the increase of inflation rate. The increase in inflation rate is also associated with currency depreciation. The international financial market dynamics affects the inflation rate in the country through asymmetric effects of exchange rate volatility. This paper also highlights that government expenditure and money supply are effective instruments for price stabilization, with their asymmetric effects taken into consideration. The evidence of the short-run symmetric impact from those variables implies that fiscal and monetary authorities should have a quick response to the price stabilization.

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