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Business cycle transmission between the USA and Indonesia: A vector error correction model

Author

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  • Munadi, Ernawati
  • Safa, Mohammad Samaun

Abstract

There are several mechanisms that can account for short-run business cycle transmission. International trade is probably the major vehicle, and it forms a direct channel through which income and price shocks may be transmitted. Capital flows provide a second mechanism which is most likely to be responsible for the transmission of interest rate, monetary and exchange rate shocks. The study attempted to focus on the income shocks transmitted between a developed country and a developing country such as the USA and Indonesia. The transmission of industrial production, prices and interest rate shocks between the two countries have been examined along with an objective to test this proposition focusing on Indonesia. The study also considered the USA-Indonesia proposition by estimating a vector error correction model. The findings of the study show that there is no co-integration between U.S. and Indonesian industrial production. Therefore it does not appear that the USA drives Indonesian business cycle fluctuations and vice versa.

Suggested Citation

  • Munadi, Ernawati & Safa, Mohammad Samaun, 2005. "Business cycle transmission between the USA and Indonesia: A vector error correction model," MPRA Paper 10755, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:10755
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    References listed on IDEAS

    as
    1. Kearney, Colm, 2000. "The determination and international transmission of stock market volatility," Global Finance Journal, Elsevier, vol. 11(1-2), pages 31-52.
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    More about this item

    Keywords

    Business cycle; co-integration; error correction model; business transmission;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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