The Impact of Changes in the Exchange Rates and Money Supply towards Inflation in the ASEAN 5: Threshold Model Application

Great attention towards inflation has been paid since several ASEAN countries adopted inflation targeting in the early 2000s. As one of the instrument of monetary policy, exchange rates and the money supply become one of the determinant for inflation stability in several countries. Using threshold model, this paper examines whether the impact of exchange rates and money supply towards the inflation is linear. Next, it also tests the threshold value, the number of identified threshold value, and the impact towards the inflation in ASEAN 5 countries. Data collected from ASEAN 5 countries, Indonesia, Malaysia, Thailand, Singapore and the Philippines, from the first quarter of the year 2000 until the fourth quarter of the year 2014. Two Stage Least Square and Generalized Method of Moment are applied as the tools for the analysis. Findings demonstrate strong evidences for threshold effect caused by the growth of money supply towards inflation. However, threshold effect does not exist in the depreciation of exchange rates and inflation. Further, empirical evidences show that the impact of money supply growth towards inflation is not linear, meanwhile the impact of changes in exchange rates towards inflation is considered linear in ASEAN 5.