Abstract
Conceptually and empirically, inflation volatility in Indonesia is a monetary and fiscal phenomenon. This study focuses on the macroeconomic policy and public policy especially causality between two variables namely inflation and money supply in Indonesia. This study uses Indonesian macroeconomic data of inflation and money supply from the Bank of Indonesia publication during 2007.1–2017.7. Inflation is measured by the consumer price index, reflects the annual percentage change in costs of acquiring a basket of goods and services to the average consumers that may change at specified intervals. Meanwhile, money supply is measured by the currency, demand deposits, time deposits, and saving deposits. Methodically, this study uses the Granger Causality model to determine the causality between inflation and money supply. The results show that there is a one-way causality between inflation and money supply in Indonesia. These findings imply that money supply causes inflation, but not vice versa. This condition implies that the role of Indonesian Government and Bank of Indonesia were very crucial in managing and controlling macroeconomic policy and public policy. Then, analysis of money supply and inflation also related to impacting factors such as money laundering, role of banks, taxation, tax evasion, and corruption.
Highlights
The role of bureaucracy or government in the process of public policy is a necessity (Dwiyanto 1997)
Our study shows that there is a one-way causality between inflation and money supply in Indonesia during 2007.1–2017.7
This causality is mainly due to the Inflation Targeting Framework set by the role of Indonesian government and Bank of Indonesia, the increased function of the Regional Inflation Monitoring Team in each region, the role separation between Bank of Indonesia in the macro prudential side and Financial Service Authority from the micro prudential side, banks’ activities or the intervention of Bank of Indonesia, acceleration of bank credit distribution, an increase in Net Foreign Assets, control of food inflation to anticipate administered prices and volatile food, and the effect of the central banks of other countries
Summary
The role of bureaucracy or government in the process of public policy is a necessity (Dwiyanto 1997). Indonesia underwent a monetary crisis in 1997 that caused the inflation rate to spike until 58% in 1998. The latest global financial crisis in 2007 did not increase the inflation rate in Indonesia as indicated by the fact that the Indonesian inflation rate in 2008 was only 9.8%, still below two digits (World Bank 2017). These conditions raise the following fundamental question: is reducing or achieving inflation a realistic target? The following figure shows the inflation rate of Indonesia during 2007.1–2017.7 (after the global financial crisis)
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