Abstract
Keywords: This study tries to test the price elasticity in money demand of Indonesia, where theory states that the price elasticity of money demand is equal to one in nonmonetary gold standard like Indonesia. The study uses quarterly data run from 1990.1 until 2010.1 or total sample of 81 quarters. The data are obtained from Bank Indonesia and International Financial Statistics of International Monetary Fund (IMF). The study uses ordinary least squares (OLS, generalized least squares (GLS), and generalized autoregressive conditional heteroscedasticity (GARCH) approaches to estimate the money demand function of Indonesia and Wald statistic is used to test the hypothesis of price elasticity of money demand in Indonesia. There are two nominal money demand functions are estimated in this study, narrow money demand function (M1) and broad demand function (M2). All of the coefficients of narrow money demand function are theoretically and statistically significant at 99 percent. Meanwhile, one of the coefficients of broad money demand function is not statistically significant at 95 percent, the coefficient is interest rate. The result shows that the price elasticity of money demand in Indonesia is not equal to one as stated by theory. The result does not support the theory for the case of Indonesia. The model and data in this study are different to previous stuady so the results could be different. Keywords: money demand, price elasticiy, Indonesia, fiat standard.
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Schedule a callMore From: Jurnal Ekonomi dan Bisnis Airlangga (J E B A) | Journal of Economics and Business Airlangga
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