Short-Term and Long-Term Estimation of Indonesia's Money Demand Using the ECM Approach
DOI:
https://doi.org/10.59890/ijma.v4i3.7Keywords:
Money Demand, Short Term, Long-Term, Error Correction ModelAbstract
In this research, Indonesia's money demand in the period 1998:Q1-2024:Q1 will be discussed. This study was conducted to estimate Indonesia's money demandFor this purpose, it will be studied whether there is an effect of structural changes in the sample period on the stability of Indonesia's money demand. This study uses the Error Correction Model (ECM) approach, where before deciding to use the model, the nature of data stationarity is first investigated. To explain the phenomenon of structural change, two treatments were made, the first treatment inserting three dummy variables into the model (D1=1, D2=1, D3=1), while the second treatment inserting four dummy variables into the model by adding D4=1. The two treatments each used three different dummy estimation techniques, namely intercept dummies, slope dummies, and slope and intercept dummies. From the results of the estimation, it is obtained that there is a possible trade-off between the equation of money demand with or without a dummy, where the demand for money without a dummy produces a significant but unstable coefficient, on the other hand, the demand for money with a dummy produces a stable model but many insignificant coefficients.
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