Economics & Sociology

ISSN: 2071-789X eISSN: 2306-3459 DOI: 10.14254/2071-789X
Index PUBMS: f5512f57-a601-11e7-8f0e-080027f4daa0
Article information
Title: The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia
Issue: Vol. 11, No 2, 2018
Published date: 06-2018 (print) / 06-2018 (online)
Journal: Economics & Sociology
ISSN: 2071-789X, eISSN: 2306-3459
Authors: Choi-Meng Leong
UCSI University

Chin-Hong Puah
Universiti Malaysia Sarawak

Venus Khim-Sen Liew
Universiti Malaysia Sarawak
Keywords: monetary model of exchange rate, Divisia monetary aggregates, bounds testing, Indonesia
DOI: 10.14254/2071-789X.2018/11-2/4
Index PUBMS: 36ddc98e-cde5-11e8-92b1-901b0efa6e97
Language: English
Pages: 52-63 (12)
JEL classification: E41, E52, C22

Stability of the exchange rate is critical for policy formulation in Indonesia and thus, has boosted the study of exchange rate behaviour. In this study, the monetary model of exchange rate has been utilised to determine the exchange rate for Indonesia. The model was improved by means of including the Divisia monetary aggregate as the money measure instead of conventional money supply. The ARDL approach, which was valid in spite of the variables’ stationary properties, was used for the estimation. The findings indicated that monetary fundamentals are significant in explaining the exchange rate movements in Indonesia when Divisia money was incorporated into the monetary model of the exchange rate. As a result, monetary fundamentals can serve as the determinants of exchange rate in addition to non-monetary fundamentals in the case of Indonesia. High magnitude of the money supply differential and the real income differential coefficients also implied that monetary targeting can serve as a useful instrument for monetary policy in addition to inflation targeting. The research is based on the data ranging from 1984Q1 to 2017Q1.


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