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Inflation Dynamics in Indonesia: Equilibrium Correction and Forward-Looking Phillips Curve Approaches

Gadjah Mada International Journal of Business

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Title Inflation Dynamics in Indonesia: Equilibrium Correction and Forward-Looking Phillips Curve Approaches
 
Creator Insukindro, Insukindro
Sahadewo, Gumilang Aryo
 
Subject correction; forward-looking; GMM; inflation; Phillips curve
 
Description A series of relatively high inflation characterize Indonesian economy, especially during the economic crisis. Economists generally agree that high inflation is one of the major economic problems, and that economic authorities need to cope with such a problem. Therefore, it is essential to understand the behavior of inflation in Indonesia. The aim of this paper is to estimate the inflation dynamics in Indonesia using equilibrium correction and forward-looking Phillips Curve approaches. Previous empirical studies show that the equilibrium correction or backward-looking approach may explain the inflation dynamics in Indonesia. The backward-looking specification does not have to be the proper model even if the fact shows that the specification holds. The major innovation of this paper is the application of a forward-looking Phillips curve model. The empirical results—estimated using the Generalized Method of Moments (GMM)—show that the forward-looking Phillips Curve approach dominates the backward-looking behavior. It indicates that after a credible monetary policy announcement, for instance, the former model predicts that economic agents will change their behavior quickly. Therefore, the policy will affect the economy more rapidly
 
Publisher Master of Management, Faculty of Economics and Business, Universitas Gadjah Mada
 
Date 2010-01-12
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://journal.ugm.ac.id/gamaijb/article/view/5515
10.22146/gamaijb.5515
 
Source Gadjah Mada International Journal of Business; Vol 12, No 1 (2010): January - April; 117 - 133
2338-7238
1411-1128
 
Language eng
 
Relation https://journal.ugm.ac.id/gamaijb/article/view/5515/4487