The Influence of Global Financial Liquidity on the Indonesian Economy: Dynamic Analysis with Threshold VAR

Mahjus Ekananda,Tulus Suryanto

doi:10.3390/economies9040162

Mahjus Ekananda, Tulus Suryanto

Open Access

https://doi.org/10.3390/economies9040162

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Abstract

Empirical studies of the global liquidity spillover on Indonesia’s economy are still relatively limited. Most of the global contagion literature on Indonesia’s economy focuses only on the effects of real shock (on output) due to financial shock. We assert that the effect of global output on Indonesia macroeconomic conditions is a fairly relevant issue to be studied. This research aims to investigate the interdependent relationships between world GDP, world commodity prices, world inflation, trade flows, capital inflow, capital account transactions, reserve accumulation, global liquidity (e.g., global broad money), and monetary aggregates, with regard to Indonesia’s GDP variables and inflation. This paper uses threshold vector autoregression (TVAR) to capture regime changes in the variables of the world economy. World economic data and Indonesia’s economic data were utilized to prove different responses to the world economic situation in two different regimes. This research identified two groups of upper regime and lower regime world variables—namely, world inflation, world GDP, and world commodity prices. TVAR estimation resulted in a smaller residual sum of squares compared to VAR estimation. Different regimes resulted in differences in Indonesia’s economic responses due to the shock of world economic variables. The findings generated by this research are expected to be insightful to monetary policymakers in Indonesia.

Highlights

For more than two decades after the Cold War, the world economy was increasingly integrated, in terms of both trade—through various free trade agreements—and financial aspects. Aizenman et al (2008) found that the level of financial openness in both developed and emerging countries in Asia and Latin America tended to increase over the period of 1991–2006, along with the lax rules of international exchange flows and international capital flows
All of the data incorporated in this research were obtained from The Central Bureau of Statistics (BPS), Bloomberg LP, and International Financial Statistics (IFS) databases (Table 1), all of which employed logarithms except for interest rate, global gross domestic product (GDP), and global
We applied the Census X12 procedure to the leveled information to minimize the seasonal impact of the information, and used a year-on-year differential for the first differential

Summary

Introduction

For more than two decades after the Cold War, the world economy was increasingly integrated, in terms of both trade—through various free trade agreements—and financial aspects. Aizenman et al (2008) found that the level of financial openness in both developed and emerging countries in Asia and Latin America tended to increase over the period of 1991–2006, along with the lax rules of international exchange flows and international capital flows. The activities of multinational corporations and financial innovations—such as corporate bond issuance and stock listing abroad— further complicate the interstate financial linkages in the present (Azis and Shin 2013). These global monetary and financial conditions are generally summarized under the umbrella term “global liquidity”, which refers to the availability of funding in global financial markets. Other aspects of the global economy that often become concerns are global production, global inflation, and global commodity prices These three variables play a notable role in the economic development of developing countries. As identified by Azis and Shin (2013), the first surge period (1995Q4–1998Q2) culminated in the Asian financial crisis, while the second surge (2006Q4–2008Q2)

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