RELATIVE PRICE IN THE DEMAND FOR INDONESIAN NARROW MONEY

Khairunnisa, Delta (2016) RELATIVE PRICE IN THE DEMAND FOR INDONESIAN NARROW MONEY. Proceeding Forum in Research, Science, and Technology (FIRST) 2016. ISSN 2461-0739

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Abstract

The present study investigates the behaviour of demand for money. Many determinants of demand for money in Indonesia and classified them into the following : interest rate variable and real income. A conventional money demand specification is then contrasted with a money demand function which contains the relative price as additional regressors. The aim of this paper is to analyse the narrow component of money demand are examined in the following ways : to examine whether a time series has a unit root test, this paper has used Augmented Dickey-Fuller (ADF) unit root test. To find the long-run relationship among the variables, this paper has applied the Engle and Granger Cointegration Test. And finally, to determine that short run dynamic of the system, this paper estimated an Error Correction Model (ECM). Using time series data for Indonesia over the period 1984-2013. The study found the existence of one cointegrating vector, indicating a valid long-run economic relationship among the determinants of demand for money. The study established that there is a valid long-run inverse relationship between demand for money and interest rate variable. The result also reveals that gross domestic product variable has a significant positive effect on demand for money. Similarly the positive effect of relative price. The result in this paper provides very strong evidence that traditional money demand studies may well be misspecified in omitting a role for relative prices.

Item Type:	Article
Uncontrolled Keywords:	interest rate, real income, relative price, money demand
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Divisions:	General > Proceeding and Seminar
Depositing User:	Administrator EPRINTS POLSRI
Date Deposited:	24 Aug 2017 03:11
Last Modified:	24 Aug 2017 03:11
URI:	http://eprints.polsri.ac.id/id/eprint/3649

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