Research Paper on Dynamic Analysis with Threshold VAR: The Impact of Global Financial Liquidity on the Indonesian Economy

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Title: Dynamic Analysis with Threshold VAR: The Impact of Global Financial Liquidity on the Indonesian Economy

Abstract: There are still only a few empirical studies on the effects of the global liquidity spillover on Indonesia’s economy. The majority of the literature on global contagion and Indonesia’s economy only considers the effects of real shock (on output) brought on by financial shock. We contend that it is fairly pertinent to investigate how global output affects the macroeconomic conditions in Indonesia. With regard to Indonesia’s GDP variables and inflation, this research aims to look into the interdependent relationships between global GDP, global commodity prices, global inflation, trade flows, capital inflows, capital account transactions, reserve accumulation, global liquidity (e.g., global broad money), and monetary aggregates. The regime changes in the variables affecting the global economy are captured in this study using threshold vector auto regression (TVAR). Data on the global economy and Indonesia’s economy were used to demonstrate how two different regimes responded differently to the global economic situation. The global inflation rate, global GDP, and global commodity prices were the two sets of upper regime and lower regime world variables identified in this study. Compared to VAR estimation, TVAR estimation produced a lower residual sum of squares. Due to the shock of global economic factors, Indonesia’s economic responses varied depending on the regime. The research’s findings are anticipated to be instructive for Indonesia’s monetary policymakers.

Keywords: threshold VAR; global inflation; inflation; financial global; finance liquidity; exchange rate; commodity

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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