Causality between money and prices in Indonesia

Parikh, A. (1984) Causality between money and prices in Indonesia. Empirical Economics, 9 (4). pp. 217-232. ISSN 0377-7332

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The purpose of this study is to examine the relationship between money supply and prices in Indonesia, where money supply is taken to be the stock of narrow money (currency + demand deposits) and prices are proxied by the Jakarta cost of living index. The period studied is 1969-1980. Two concepts of causality namely "proper" causality in which the causal effect takes at least one quarter to manifest itself and "instantaneous" causality in which there are no lags, are employed. The hypothesis of "proper" causality is rejected by both Granger and Sims tests. However, the hypothesis that money and prices are contemporaneously correlated cannot be easily dismissed. Using the framework of [Geweke], contemporaneous causality is treated as a part of linear feedback and the lagged version of Sims test was used. We found that the hypothesis that prices cause money supply cannot be dismissed on the basis of Wald test. However, the contribution of instantaneous causality is very large to the total variance of linear feedback.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Social Work
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Depositing User: Pure Connector
Date Deposited: 22 Nov 2013 15:14
Last Modified: 24 Oct 2022 05:03
DOI: 10.1007/BF01973033

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