Title: Monetary integration in the ASEAN Economic Community challenge: the role of the exchange rate on inflation in Indonesia

Authors: Heru Rahadyan; Alexander Lubis

Addresses: Bank Indonesia, Jl. MH. Thamrin No. 2, Jakarta Pusat, Jakarta, 10350, Indonesia ' Bank Indonesia, Jl. MH. Thamrin No. 2, Jakarta Pusat, Jakarta, 10350, Indonesia

Abstract: The implementation of the ASEAN Economic Community (AEC) in 2015 required some form of monetary integration, such as exchange rate management. This paper investigates the role of the exchange rate on the inflation rate in Indonesia. Using the monthly data series from 1970 to 2015, we find that the nominal exchange rate affects the inflation rate at a low transmission speed rate. However, the exchange rate volatility and depreciation threshold may accelerate the speed of the exchange rate's transmission to inflation. Thus, studies with short-lagged variables, or studies in different periods may lead to different findings, as shocks and changes in exchange regimes occur regularly in Indonesia. These findings are important as they imply that Indonesia may fail to reach the aims of the AEC if it fails to coordinate its exchange rate policy with the rest of the AEC.

Keywords: exchange rate pass-through; ERPT; exchange rate; inflation; monetary policy; Association of Southeast Asian Nations; ASEAN; ASEAN Economic Community; AEC; Indonesia.

DOI: 10.1504/IJSTM.2018.094438

International Journal of Services Technology and Management, 2018 Vol.24 No.5/6, pp.463 - 479

Received: 01 Oct 2016
Accepted: 25 May 2017

Published online: 25 Jul 2018 *

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