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http://dx.doi.org/10.13106/jafeb.2021.vol8.no7.0393

Symmetric and Asymmetric Approaches to Money Demand Determination in Indonesia: Is Divisia Money Relevant?  

LEONG, Choi-Meng (Faculty of Business and Management, UCSI University)
PUAH, Chin-Hong (Faculty of Economics and Business, Universiti Malaysia Sarawak)
TANG, Maggie May-Jean (Faculty of Business, Design and Arts, Swinburne University of Technology)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.7, 2021 , pp. 393-402 More about this Journal
Abstract
This study aims to examine whether symmetric effects or asymmetric effects of exchange rates exist in determining the money demand in Indonesia. Simple-sum money and Divisia money were included in different models for comparison due to the financial developments in Indonesia. This study uses time-series data from 1996Q1 to 2019Q4 for the estimation. The nonlinear autoregressive distributed lag (NARDL) model is utilized to verify the asymmetric effects of exchange rates on money demand. The Augmented Dickey-Fuller and Phillips-Perron unit root tests were performed to verify the order of integration of the variables. The findings of this study revealed that the exchange rate is one of the most important determinants of money demand in Indonesia and the effect is asymmetric. The findings further indicated that money demand function, which incorporates Divisia monetary aggregate is parsimonious. Monetary targets such as money supply and interest rates are critical for monetary policy conduct to achieve inflation levels set by government. As the adoption of an inflation targeting framework needs to be in keeping with the flexible exchange rate system, the asymmetric effect of exchange rate changes can be used in exchange rate policy conduct to achieve financial system and price stability.
Keywords
Asymmetric; Nonlinear; Divisia; Money Demand; Exchange Rate;
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