Indonesia's Money Demand Stability Influenced by Monetary Policy Changes and Crises

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FORMOSA NEWS

The stability of money demand in Indonesia is significantly influenced by structural economic changes, including financial liberalization and the dynamics of the monetary policy framework. Recent research conducted by Krisnaldy from Universitas Pamulang in July 2026 examines the estimation of money demand in Indonesia using the Error Correction Model (ECM) approach with time-series data spanning from 1998 to 2024. This study plays a crucial role for monetary authorities in ensuring the effectiveness of policy transmission as well as maintaining price stability and economic growth.

Monetary planning requires a deep understanding of the behavioral characteristics of the public in holding money amidst a dynamic macroeconomic climate. Over the past three decades, Indonesia has experienced several profound structural transformations, ranging from the era of deregulation and banking liberalization to the 1997-1998 Asian financial crisis, and the shift in the policy framework from Base Money Targeting to the Inflation Targeting Framework (ITF). These various shocks have altered public economic behavior patterns and necessitated a re-evaluation of money demand function specifications.

To examine this phenomenon, the study applies a quantitative descriptive method utilizing ECM econometric techniques and the inclusion of dummy variables to capture the impact of structural shocks. The analysis was conducted through two treatments involving dummy variable additions—using intercept dummies, slope dummies, or a combination of both—to evaluate short-term and long-term equilibrium.

Based on the estimation results, several key findings were identified:

• The money demand model without dummy variables yields significant coefficients but lacks long-term stability.
• Conversely, the inclusion of dummy variables reflecting crises and policy framework changes successfully creates a stable estimation model, although many coefficients become insignificant due to a reduction in degrees of freedom.
• All models exhibit slow convergence adjustment characteristics, reflecting the typical behavior of developing countries in responding to market adjustments.
• The shocks of the 1997-1998 Asian financial crisis proved to have a significant influence on money demand movements, particularly within the short-term adjustment model.

These findings indicate a trade-off for policymakers between choosing a model with stable parameters or a model with fully significant variables. Money demand stability proves to be an absolute prerequisite for central bank monetary policy to operate consistently in controlling price stability amidst global economic dynamics.

Author Profiles

• Krisnaldy, S.E., M.M. – Lecturer and researcher at Universitas Pamulang.

Research Sources:

• Article Title: Short-Term and Long-Term Estimation of Indonesia's Money Demand Using the ECM Approach
• Journal Name: International Journal of Management Analytics (IJMA)
• Publication Year: 2026
• DOI: https://doi.org/10.59890/ijma.v4i3.7