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Frictions and empirical fit in a DSGE model for Indonesia

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  • Zams, Bastian Muzbar

Abstract

I build a small-scale dynamic stochastic general equilibrium (DSGE) model for Indonesia and assess which structural features of the model are consistent with actual data. I show that the best-fitting model does not include habit formation or backward-looking price indexation, which are widely assumed features in standard DSGE models. Money-holding friction, however, is found to be an important feature. When these features are assumed to be present, I find that the degrees of habit formation and price indexation decline after full-fledged adoption of the inflation targeting framework in Indonesia. This implies that agents of the economy believe that Bank Indonesia’s monetary policy is credible in achieving its inflation target. When using a large-scale DSGE model for policy analysis, central banks must evaluate which frictions should be included.

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  • Zams, Bastian Muzbar, 2021. "Frictions and empirical fit in a DSGE model for Indonesia," Economic Modelling, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:ecmode:v:99:y:2021:i:c:s0264999321000705
    DOI: 10.1016/j.econmod.2021.03.006
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    Cited by:

    1. Zhian Zhiow Augustinne Wong & Ramez Abubakr Badeeb & Abey P. Philip, 2023. "Financial Inclusion, Poverty, and Income Inequality in ASEAN Countries: Does Financial Innovation Matter?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(1), pages 471-503, September.
    2. Lie, Denny, 2021. "Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 532-552.
    3. Danny Hermawan Adiwibowo & Aryo Sasongko & Denny Lie, 2022. "Money Velocity, Digital Currency, And Inflation Dynamics," Working Papers WP/13/2022, Bank Indonesia.

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    More about this item

    Keywords

    Small-scale DSGE models; Habit formation; Price indexation; Cash-in-advance; Indonesia;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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