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2024 | OriginalPaper | Buchkapitel

2. Impacts of Monetary Policy on Consumer Demand of High- and Low-Income Groups in Indonesia

verfasst von : Gunawan Wicaksono, Kieran P. Donaghy, Clifford R. Wymer

Erschienen in: The Indonesian Economy and the Surrounding Regions in the 21st Century

Verlag: Springer Nature Singapore

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Abstract

The research reported in this paper examines how changes in liquidity (or flows of financial services from monetary assets) affect commodity prices, levels of consumer expenditures on commodities, and the abilities of consumers in high- and low-income groups in Indonesia to adjust shares of expenditures to optimize their welfare (utility). A dynamic system of demand equations for each income group is specified on the basis of Cooper and McLaren’s (1992) Modified Price-Independent Generalized Logarithmic (MPIGLOG) demand system and Anderson and Blundell’s (1983) disequilibrium adjustment mechanism. A bloc of dynamic price equations is also specified, based on the principle of excess demand adjustment. In the model, income groups adjust their shares of aggregate expenditures on food, housing, and other items to partial-equilibrium levels, given commodity prices and the groups’ respective allocations of aggregate expenditures. Changes in the rate of growth of the supply of base money, determined by Bank Indonesia policy, influence changes in prices and income groups’ commodity expenditure levels, hence, levels of welfare derived from the consumption of commodities. The continuous-time model is estimated with annual time-series data on expenditures, prices, and financial aggregates by a non-linear quasi-Newton-maximum-likelihood procedure. The estimation results suggest that the demand systems for the two income groups studied in Indonesia are different but that adjustments in prices and consumption expenditures of both income groups have been affected by monetary policy. Counterfactual simulations of variations in monetary policy suggest that changes in the historical rate of growth of the money supply would have had discernibly sizable effects, that income groups would have been affected differently, and that increasing rates of growth of money would not have necessarily led to increasing prices for all commodities.

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Vorheriges Kapitel Iwan Jaya Azis: A Person, an Economist, and a Regional Scientist

Nächstes Kapitel Rapid Urbanization: The Challenges and Opportunities for Planning in Indonesian Cities

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That is, not all properties of a well-behaved demand system—commonly referred to as curvature conditions—are realized at every data point. See, e.g., Diewert and Wales (1987) and Cooper and McLaren (1992).

See Footnote 5 below for a fuller discussion on issues in continuous-time econometric modeling.

We note here that this paper presents a complementary perspective to important research by Iwan Azis, in whose honor this festschrift has been compiled, on the welfare effects of financial crises (unplanned events) in that its focus is on the effect of planned policies. See Azis (2003, 2014).

At least this was the case at the time, 2012, the research on which this paper is based was begun.

Cooper and McLaren (1992) suggest that ‘quality variables’ may be introduced to the model’s specification to improve aggregation properties.

Other considerations favoring a continuous-time specification are that (1) differential equation systems are more analytically tractable than systems of difference-equations; (2) once estimated, they can be solved or simulated for any time-interval; (3) there is no natural time unit of observation for aggregate behavior of a macro-economy; (4) aggregate economic behavior is ongoing; (5) (as noted above) stock and flow variables can be treated correctly in continuous-time systems; and (6) distributed lag processes can be handled better (Gandolfo 1993; Bergstrom 1996; Wymer 1996). With the development of the WYSEA software package, and the ESCONA program in particular (Wymer 2006), and the processing capability to implement it, nonlinear continuous-time models can now be estimated and simulated straightforwardly using continuous-time econometric methods.

Integrating (6) over a period of time yields the Divisia aggregate flow of financial services for that period.

This observation was true at the time the initial research for this paper was conducted.

In Eq. (2.9), λ_cc represents a target relative to the other terms in the brackets. We note that its estimate may not correspond directly to a targeted rate of growth of the money supply, since this parameter is estimated jointly with other parameters in the equation.

Endogenizing commodity prices does not put this research up against a degrees of freedom constraint. To employ a full-system maximum-likelihood estimator, the number of observations must be no less than the number of variables in the model (Fisher 1966), and this condition is met.

Once the parameters of the two price indices which feature in the MPIGLOG family of cost functions and the indirect utility function that is dual to it, have been estimated, the welfare (cardinal utility) of each income group can be computed from Eq. (2.2).

Both income groups spent more on food than usual during the Asian financial crisis of 1997 and 1998.

The partial adjustment parameters for the commodity price equations— \( {\gamma}_f^P \), \( {\gamma}_h^P \), and \( {\gamma}_o^P \)—were constrained to lie between 0.1 and 2.0 with the intent of obtaining more accurate estimates of the behavioral parameters in the price equations.

Note that, given the flexible functional forms employed in the modified almost ideal demand system and the non-homothetic characterization of utility, all elasticities are time-varying. We have selected 1999, the year after the recovery from the Asian Financial Crisis, as the data point at which to illustrate responses of the two income groups to changes in expenditure levels and prices.

We should acknowledge that, because the interest rate variables, which would surely have been affected by changes in the rate of growth of the money supply we have been considering, are exogenous, the simulations we have conducted are still to a large extent partial-equilibrium in nature.

Note that the cardinal utility measures for the two income groups are not directly comparable because they are based on differently calibrated price aggregators.

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Titel: Impacts of Monetary Policy on Consumer Demand of High- and Low-Income Groups in Indonesia
verfasst von: Gunawan Wicaksono
Kieran P. Donaghy
Clifford R. Wymer
Verlag: Springer Nature Singapore
Buch: The Indonesian Economy and the Surrounding Regions in the 21st Century
Print ISBN: 978-981-9701-21-6

Electronic ISBN: 978-981-9701-22-3

Copyright-Jahr: 2024
DOI: https://doi.org/10.1007/978-981-97-0122-3_2

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