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Financial Liberalization and Divisia Money Demand in Indonesia

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Money demand function that turns out to be unstable due to the financial liberalization has affected the effectiveness of monetary policy that utilizes monetary targeting as policy target. Thus, Divisia monetary aggregate that is consistent with the economic theory has been used to examine the money demand function in Indonesia. Monetization is also included as a determinant of money demand to measure the financial deepening. A stable M2 money demand has been identified via the use of Divisia M2 money and the inclusion of monetization variable. Monetary targeting can serve as alternative policy target for Indonesia and there is a possibility for a return to monetary targeting in Indonesia.

Keywords: Divisia; Financial Liberalization; Monetization and Money Demand

Document Type: Research Article

Affiliations: 1: Faculty of Low Universitas Prima Indonesia, 20113, Jalan Sekip Simpang Sikambing, Medan, North Sumatera, Indonesia 2: Academic Department, Technology College Sarawak, Lot 459, Block 14, Jalan Sultan Tengah, Petra Jaya, 93050 Kuching, Sarawak, Malaysia 3: Faculty of Economics and Business, Universiti Malaysia Sarawak, 94300 Kota Samarahan, Sarawak, Malaysia

Publication date: April 1, 2017

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