Abstract
The purpose of the study is to integrate the influence on prices which flow not only from monetary changes but also from other exogenous shocks (harvest failures, devaluations or changes in world market prices on key export commodities) with the influences of money supply caused not only by government policy changes but also from previous or expected price changes. The findings suggest that although monetary authorities have some control over the money supply changes can be exogenously determined. By contrast, it is also found that the rate of inflation (proxy for interest rate in a developing economy) which is generally considered to be an important element in the money demand function does not turn out to be a significant factor in recent Indonesian experience. The formulated model in this paper is dynamically simulated and seems to possess desirable properties namely positive prices and stable solutions.
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