IDEAS home Printed from https://ideas.repec.org/a/gam/jecomi/v9y2021i4p162-d666813.html
   My bibliography  Save this article

The Influence of Global Financial Liquidity on the Indonesian Economy: Dynamic Analysis with Threshold VAR

Author

Listed:
  • Mahjus Ekananda

    (Faculty of Economics and Business, University of Indonesia, Depok 16424, Jawa Barat, Indonesia)

  • Tulus Suryanto

    (Faculty of Economics and Islamic Business, Raden Intan State Islamic University of Lampung, Bandar Lampung 35131, Lampung, Indonesia)

Abstract

Empirical studies of the global liquidity spillover on Indonesia’s economy are still relatively limited. Most of the global contagion literature on Indonesia’s economy focuses only on the effects of real shock (on output) due to financial shock. We assert that the effect of global output on Indonesia macroeconomic conditions is a fairly relevant issue to be studied. This research aims to investigate the interdependent relationships between world GDP, world commodity prices, world inflation, trade flows, capital inflow, capital account transactions, reserve accumulation, global liquidity (e.g., global broad money), and monetary aggregates, with regard to Indonesia’s GDP variables and inflation. This paper uses threshold vector autoregression (TVAR) to capture regime changes in the variables of the world economy. World economic data and Indonesia’s economic data were utilized to prove different responses to the world economic situation in two different regimes. This research identified two groups of upper regime and lower regime world variables—namely, world inflation, world GDP, and world commodity prices. TVAR estimation resulted in a smaller residual sum of squares compared to VAR estimation. Different regimes resulted in differences in Indonesia’s economic responses due to the shock of world economic variables. The findings generated by this research are expected to be insightful to monetary policymakers in Indonesia.

Suggested Citation

  • Mahjus Ekananda & Tulus Suryanto, 2021. "The Influence of Global Financial Liquidity on the Indonesian Economy: Dynamic Analysis with Threshold VAR," Economies, MDPI, vol. 9(4), pages 1-20, October.
    • Handle: RePEc:gam:jecomi:v:9:y:2021:i:4:p:162-:d:666813
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7099/9/4/162/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7099/9/4/162/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sousa, Joao Miguel & Zaghini, Andrea, 2007. "Global monetary policy shocks in the G5: A SVAR approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 403-419, December.
    2. Ms. L. Effie Psalida & Tao Sun, 2011. "Does G-4 Liquidity Spill Over?," IMF Working Papers 2011/237, International Monetary Fund.
    3. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 665-696.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    5. Brana, Sophie & Djigbenou, Marie-Louise & Prat, Stéphanie, 2012. "Global excess liquidity and asset prices in emerging countries: A PVAR approach," Emerging Markets Review, Elsevier, vol. 13(3), pages 256-267.
    6. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-353, May.
    7. DJIGBENOU-KRE, Marie-Louise & Park, Hail, 2016. "The effects of global liquidity on global imbalances," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 1-12.
    8. António Afonso & Jaromír Baxa & Michal Slavík, 2018. "Fiscal developments and financial stress: a threshold VAR analysis," Empirical Economics, Springer, vol. 54(2), pages 395-423, March.
    9. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    10. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    11. Jacob A. Frenkel & Assaf Razin, 1987. "The Mundell-Fleming Model a Quarter Century Later: A Unified Exposition," IMF Staff Papers, Palgrave Macmillan, vol. 34(4), pages 567-620, December.
    12. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
    13. Jungho Baek, 2021. "Crude oil prices and macroeconomic activities: a structural VAR approach to Indonesia," Applied Economics, Taylor & Francis Journals, vol. 53(22), pages 2527-2538, May.
    14. Bruce Hansen, 1999. "Testing for Linearity," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 551-576, December.
    15. Tim Ng, 2011. "The predictive content of financial cycle measures for output fluctuations," BIS Quarterly Review, Bank for International Settlements, June.
    16. Hansen,B.E., 1999. "Testing for linearity," Working papers 7, Wisconsin Madison - Social Systems.
    17. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    18. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
    19. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    20. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
    21. Denis Gromb & Dimitri Vayanos, 2010. "A Model of Financial Market Liquidity Based on Intermediary Capital," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 456-466, 04-05.
    22. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    23. Matthew S. Yiu & Sahminan Sahminan, 2017. "Global Liquidity, Capital Inflows and House Prices in ASEAN Economies," International Real Estate Review, Global Social Science Institute, vol. 20(1), pages 105-126.
    24. Mahjus Ekananda, 2017. "Analysis of the Macroeconomic Impact towards the NPL National Banking in Indonesia: The Study of Macro-Economic Shock Using Vector Autoregression Models," European Research Studies Journal, European Research Studies Journal, vol. 0(3A), pages 396-416.
    25. Dietrich Domanski & Ingo Fender & Patrick McGuire, 2011. "Assessing global liquidity," BIS Quarterly Review, Bank for International Settlements, December.
    26. Arisara Romyen & Jianxu Liu & Songsak Sriboonchitta, 2019. "Export–Output Growth Nexus Using Threshold VAR and VEC Models: Empirical Evidence from Thailand," Economies, MDPI, vol. 7(2), pages 1-16, June.
    27. repec:pri:cepsud:91malkiel is not listed on IDEAS
    28. Nathan S. Balke, 2000. "Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 344-349, May.
    29. Asian Development Bank (ADB), 2013. "How Do Global Liquidity Phases Manifest Themselves in Asia?," ADB Reports RPT136042-3, Asian Development Bank (ADB), revised 05 Nov 2013.
    30. Mr. Akito Matsumoto, 2011. "Global Liquidity: Availability of Funds for Safe and Risky Assets," IMF Working Papers 2011/136, International Monetary Fund.
    31. Tulus Suryanto & Darul Dimasqy & Reza Ronaldo & Mahjus Ekananda & Teuku Heru Dinata & Indra Tumbelaka, 2020. "The Influence of Liberalization on Innovation, Performance, and Competition Level of Insurance Industry in Indonesia," Sustainability, MDPI, vol. 12(24), pages 1-25, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Björn Roye, 2014. "Financial stress and economic activity in Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(1), pages 101-126, February.
    2. Christiane Baumeister & Eveline Durinck & Gert Peersman, 2008. "Liquidity, Inflation and Asset Prices in a Time-Varying Framework for the Euro Area," Discussion Papers 08/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    4. Kirstin Hubrich & Timo Teräsvirta, 2013. "Thresholds and Smooth Transitions in Vector Autoregressive Models," CREATES Research Papers 2013-18, Department of Economics and Business Economics, Aarhus University.
    5. Brana, Sophie & Prat, Stéphanie, 2016. "The effects of global excess liquidity on emerging stock market returns: Evidence from a panel threshold model," Economic Modelling, Elsevier, vol. 52(PA), pages 26-34.
    6. Gian Paulo Soave, 2015. "Choques fiscais e instabilidade financeira no Brasil: uma abordagem TVAR," Working Papers, Department of Economics 2015_02, University of São Paulo (FEA-USP).
    7. repec:wsr:wpaper:y:2019:i:189 is not listed on IDEAS
    8. Peter Martey Addo, 2014. "Multivariate Self-Exciting Threshold Autoregressive Models with eXogenous Input," Papers 1407.7738, arXiv.org.
    9. Paulo Sergio Ceretta & Alexandre Silva Da costa, 2017. "The Gap Effect on the Brazilian Exchange," Economics Bulletin, AccessEcon, vol. 37(4), pages 2505-2516.
    10. Rozina Shaheen, 2020. "Credit market conditions and impact of monetary policy in a developing economy context," International Economics and Economic Policy, Springer, vol. 17(2), pages 409-425, May.
    11. David M. Ritzwoller & Joseph P. Romano, 2019. "Uncertainty in the Hot Hand Fallacy: Detecting Streaky Alternatives to Random Bernoulli Sequences," Papers 1908.01406, arXiv.org, revised Apr 2021.
    12. Aslanidis, Nektarios, 2007. "Business Cycle Regimes in CEECs Production: A Threshold SURE Approach," Working Papers 2072/5318, Universitat Rovira i Virgili, Department of Economics.
    13. Jitka Veselá & Alžběta Zíková, 2022. "Are the Czech, Polish, German and Dutch markets taking a random walk? [Konají český, polský, německý a nizozemský trh náhodnou procházku?]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2022(2), pages 19-38.
    14. Muchnik, Lev & Bunde, Armin & Havlin, Shlomo, 2009. "Long term memory in extreme returns of financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(19), pages 4145-4150.
    15. John Sabelhaus, 2005. "Alternative Methods for Projecting Equity Returns: Implications for Evaluating Social Security Reform Proposals," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 8(1), pages 43-63, March.
    16. Cristi Spulbar & Ramona Birau & Lucian Florin Spulbar, 2021. "A Critical Survey on Efficient Market Hypothesis (EMH), Adaptive Market Hypothesis (AMH) and Fractal Markets Hypothesis (FMH) Considering Their Implication on Stock Markets Behavior," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 1161-1165, December.
    17. Stephen Bell & John Quiggin, 2006. "Asset Price Instability and Policy Responses: The Legacy of Liberalization," Journal of Economic Issues, Taylor & Francis Journals, vol. 40(3), pages 629-649, September.
    18. Mahata, Ajit & Rai, Anish & Nurujjaman, Md. & Prakash, Om, 2021. "Modeling and analysis of the effect of COVID-19 on the stock price: V and L-shape recovery," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    19. Abootaleb Shirvani & Svetlozar T. Rachev & Frank J. Fabozzi, 2019. "A Rational Finance Explanation of the Stock Predictability Puzzle," Papers 1911.02194, arXiv.org.
    20. Cheng, Sheng & Cao, Yan, 2019. "On the relation between global food and crude oil prices: An empirical investigation in a nonlinear framework," Energy Economics, Elsevier, vol. 81(C), pages 422-432.
    21. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecomi:v:9:y:2021:i:4:p:162-:d:666813. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.