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Dynamic Relationship Between Inflation and Growth in Indonesia : Regional Threshold Approach Tri Winarno, 2014 Discussion by Kue-Peng Chuah chuahkp@bnm.gov.my Bank Negara Malaysia Economics Research Workshop 1 December 2014 KP Chuah

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Dynamic Relationship Between Inflation and Growth in Indonesia: Regional Threshold Approach

Tri Winarno, 2014

Discussion by Kue-Peng Chuah

chuahkp@bnm.gov.my

Bank Negara Malaysia Economics Research Workshop 1 December 2014

KP Chuah Inflation – Growth Threshold 1 December 2014 1 / 11

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Disclaimer The views expressed in this presentation does not represent that of Bank Negara Malaysia (Central Bank of Malaysia)

KP Chuah Inflation – Growth Threshold 1 December 2014 2 / 11

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Summary of the paper

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia Controls: Initial income, loan and population growth, trade openness terms of trade

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia Controls: Initial income, loan and population growth, trade openness terms of trade Empirical contributions

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia Controls: Initial income, loan and population growth, trade openness terms of trade Empirical contributions Construct a “unique” panel data

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia Controls: Initial income, loan and population growth, trade openness terms of trade Empirical contributions Construct a “unique” panel data Non-linear relationship between inflation and growth in Indonesia

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Summary of the paper

When is inflation bad (good) for growth? Inflation above 4.6 % (threshold) could have negative impact on growth Apply threshold regressions using panel data Annual data [2002:2012] from 26 regions in Indonesia Controls: Initial income, loan and population growth, trade openness terms of trade Empirical contributions Construct a “unique” panel data Non-linear relationship between inflation and growth in Indonesia “Signpost” to monitor inflation and to guide the inflation target

KP Chuah Inflation – Growth Threshold 1 December 2014 3 / 11

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Comments and Questions

KP Chuah Inflation – Growth Threshold 1 December 2014 4 / 11

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Comments and Questions

More motivation

KP Chuah Inflation – Growth Threshold 1 December 2014 4 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

KP Chuah Inflation – Growth Threshold 1 December 2014 4 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

Prima facie evidence of non-linearity

KP Chuah Inflation – Growth Threshold 1 December 2014 4 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

Prima facie evidence of non-linearity Some stylised facts on inflation – growth nexus

KP Chuah Inflation – Growth Threshold 1 December 2014 4 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

Prima facie evidence of non-linearity Some stylised facts on inflation – growth nexus

Threshold estimate considered low for a developing country

KP Chuah Inflation – Growth Threshold 1 December 2014 7 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

Prima facie evidence of non-linearity Some stylised facts on inflation – growth nexus

Threshold estimate considered low for a developing country

What drives the results? (region, period)

KP Chuah Inflation – Growth Threshold 1 December 2014 7 / 11

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Comments and Questions

More motivation Visual inspection of Indonesian data

Prima facie evidence of non-linearity Some stylised facts on inflation – growth nexus

Threshold estimate considered low for a developing country

What drives the results? (region, period) Incidence of aggregate inflation around 5% (peak, trough, outliers)

KP Chuah Inflation – Growth Threshold 1 December 2014 7 / 11

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Comments and Questions

More robustness analysis

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s)

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models)

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data)

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data) Alternative specifications to split the threshold regimes

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data) Alternative specifications to split the threshold regimes

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data) Alternative specifications to split the threshold regimes

Relationship between inflation with other co-variates can change π I(π ≤ γ) vs. (π, z) I(π ≤ γ)

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data) Alternative specifications to split the threshold regimes

Relationship between inflation with other co-variates can change π I(π ≤ γ) vs. (π, z) I(π ≤ γ)

Different types or more controls

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions

More robustness analysis Test for the “existence” of threshold(s) Results from the linear model (vs. non-linear models) Results based on aggregate data (vs. regional data) Alternative specifications to split the threshold regimes

Relationship between inflation with other co-variates can change π I(π ≤ γ) vs. (π, z) I(π ≤ γ)

Different types or more controls

Initial income has a positive coefficient (no regional catch up) More intuition on the impact of the other co-variates

KP Chuah Inflation – Growth Threshold 1 December 2014 8 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices) KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

Communicating the inflation threshold (should we, how)

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

Communicating the inflation threshold (should we, how)

Some inflation is good for growth

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

Communicating the inflation threshold (should we, how)

Some inflation is good for growth Uncertainty of threshold estimation (a range perhaps)

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

Communicating the inflation threshold (should we, how)

Some inflation is good for growth Uncertainty of threshold estimation (a range perhaps)

Threshold vs. inflation target for 2015: 4% ± 1%

(Bank Indonesia Monetary Policy Review October 2014)

Inflation target “guided” by the threshold (judgement, upper bound)

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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Comments and Questions last slide!

So what? Implications for central bank and monetary policy Inflation impact during price reforms

(e.g. adjustments of petrol prices)

Resultant inflation can exceed the threshold Important to anchor inflation expectations

Communicating the inflation threshold (should we, how)

Some inflation is good for growth Uncertainty of threshold estimation (a range perhaps)

Threshold vs. inflation target for 2015: 4% ± 1%

(Bank Indonesia Monetary Policy Review October 2014)

Inflation target “guided” by the threshold (judgement, upper bound) Other inflation dynamics are also important (persistence, volatility)

KP Chuah Inflation – Growth Threshold 1 December 2014 9 / 11

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References

A. Bick, 2010, “Threshold Effects of Inflation on Economic Growth in Developing

Countries”, Economic Letters

A. Bick, S. Kremer, and D. Nautz, 2013, “Inflation and Growth: New Evidence From a

Dynamic Panel Threshold Analysis”, Empirical Economics

B. Hansen, 1999, “Threshold Effects in Non-dynamics Panels: Estimation, Testing and

Inference”, Journal of Econometrics

M. Caner and B. Hansen, 2004, “Instrumental Variables Estimation of a Threshold

Model”, Econometric Theory

K. Chuah and S. Devadas, 2014, “Threshold Effects of Private Sector Credit on Output:

Evidence from Emerging Market Economies”, unpublished manuscript

KP Chuah Inflation – Growth Threshold 1 December 2014 10 / 11

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The End Thank you

KP Chuah Inflation – Growth Threshold 1 December 2014 11 / 11