Abstract:
In most countries, monetary policies are implemented in order to maintain
economic stability. The policy may employ interest rate or money supply to
derive the assigned national inflation target. Most studies investigate the
relationship between monetary policy and inflation use national data. Based
on the idea that inflation is a regional phenomenon, the application of
provincial data might be more appropriate explaining the relationship
between monetary policy and inflation. The study elaborate the impact of
changes in provincial money supply, BI Rate (interest rates of central bank),
and PUAB (money market interest rates) to regional inflation in the
framework Hybrid New Keynesian Phillips Curve (HNKPC). The study
employs Generalized Method of Moments (GMM) techniques on panel data of
32 provinces from 2005-III to 2014-JV. The data is classified into 4 groups,
which are Jawa-Bali (Wl), Sumatera (W2), Kalimantan-Sulawesi (W3), and
Papua-Maluku-Nusa Tenggara (W4). The estimation result shows that
provincial monetary aggregate influence inflation significantly only in
Sumatera. Furthermore, inflation is also effect by BI Rate in Sumatera and
Kalimantan-Sulawesi. The study also found that PUAB is significantly
affecting inflation in almost all Indonesian regions, except Kalimantan-Sulawesi.
This study concludes that interest rates, BI rate and PUAB, is more
appropriate than change in provincial money supply to control provincial
inflation.
