Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia

Ensuring low and stable price environment has been one of the major macroeconomic objectives in most economy throughout the globe. Indeed, a stable price environment is an indication of a healthy economy as it provides an optimum environment for creation of real economic activity. In a stable price...

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Main Authors:	Wiranata Kusuma, Dimas Bagus, Kassim, Salina, Fikri, Muhammad
Format:	Conference or Workshop Item
Language:	English
Published:	2011
Subjects:	HG201 Money
Online Access:	http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/1/dynamics_of_inflation_determinants.pdf

id	iium-25030
recordtype	eprints
spelling	iium-250302012-08-01T01:59:36Z http://irep.iium.edu.my/25030/ Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia Wiranata Kusuma, Dimas Bagus Kassim, Salina Fikri, Muhammad HG201 Money Ensuring low and stable price environment has been one of the major macroeconomic objectives in most economy throughout the globe. Indeed, a stable price environment is an indication of a healthy economy as it provides an optimum environment for creation of real economic activity. In a stable price environment, economic agents are able to plan ahead in major economic decisions, let it be in investment, consumption, or production activities. Thus, understanding factors determining inflation is highly relevant and is the hallmark for effective macroeconomic stabilization policies. This study attempts to address two research questions: (1) what are the causes of inflation in a conventional monetary system compared to an Islamic monetary system? (2) Would inflation situation be different in a conventional monetary system compared to an Islamic monetary system? In efforts to achieve its objectives, the study analyzes the behavior of inflation in the two different monetary systems. First, under the conventional monetary system, the study empirically analyzes the inflation dynamics with several possible determinants of inflation, namely excess money supply from money creation or fiat money, excess money supply from credit creation or fractional reserve banking, interest rate, and exchange rate. Second, under the Islamic monetary system, the following variables are considered in the analysis: Islamic money, PLS return, and gold price. As for the dependent variable, several measures of inflation are used to ensure consistency of the findings such as CPI inflation, food inflation, administered inflation, and expected inflation. The study analyzes monthly data covering the period from January 1995 to February 2011. For comparative purposes and more enriching discussions, the period of analysis is being divided into various sub-periods, namely: (1) pre-crisis period - January 1995-December 1996; (2) during crisis period I - January 1997-December 1998; (3) post-crisis period - January 1999-December 2006, and (4) during crisis period II – January 2007-February 2011. In the methodology, the study relies on the Vector Auto Regression. Additionally, to determine the inter-relationship among the variables, innovation accounting of variance decomposition analysis is also adopted. The study finds that when the main three conventional sources of inflation of fiat money, interest rate and exchange rate are replaced by their Islamic counterparts variables of Islamic money, PLS return, and gold price, the rate of inflation drops significantly. In addition, the study provides empirical evidence that the conventional variables of fiat money, interest rate and exchange rate contribute significantly in explaining the variations of inflation in Malaysia. Based on the findings, the study concludes that increasing the share of PLS-based Islamic finance and relying on gold in the payment system would contribute towards greater price stability in the economy. Thus, there is a need to reduce the dependency on the riba-based system as the study has empirically shown that the riba-based system is inflation generating and would lead to macroeconomic instability 2011 Conference or Workshop Item PeerReviewed application/pdf en http://irep.iium.edu.my/25030/1/dynamics_of_inflation_determinants.pdf Wiranata Kusuma, Dimas Bagus and Kassim, Salina and Fikri, Muhammad (2011) Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia. In: 2nd World Conference on Riba: The Riba Conundrum: Impartial Outlook from Accounting and Religious Perspectives, 26-27 July 2011, Putra World Trade Centre (PWTC), Kuala Lumpur. http://www.iium.edu.my/kenms/events/2nd-world-conference-riba http://xa.yimg.com/kq/groups/23484025/113994623/name/PROCEEDINGS+A4+Size.pdf#page=100
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HG201 Money
spellingShingle	HG201 Money Wiranata Kusuma, Dimas Bagus Kassim, Salina Fikri, Muhammad Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
description	Ensuring low and stable price environment has been one of the major macroeconomic objectives in most economy throughout the globe. Indeed, a stable price environment is an indication of a healthy economy as it provides an optimum environment for creation of real economic activity. In a stable price environment, economic agents are able to plan ahead in major economic decisions, let it be in investment, consumption, or production activities. Thus, understanding factors determining inflation is highly relevant and is the hallmark for effective macroeconomic stabilization policies. This study attempts to address two research questions: (1) what are the causes of inflation in a conventional monetary system compared to an Islamic monetary system? (2) Would inflation situation be different in a conventional monetary system compared to an Islamic monetary system? In efforts to achieve its objectives, the study analyzes the behavior of inflation in the two different monetary systems. First, under the conventional monetary system, the study empirically analyzes the inflation dynamics with several possible determinants of inflation, namely excess money supply from money creation or fiat money, excess money supply from credit creation or fractional reserve banking, interest rate, and exchange rate. Second, under the Islamic monetary system, the following variables are considered in the analysis: Islamic money, PLS return, and gold price. As for the dependent variable, several measures of inflation are used to ensure consistency of the findings such as CPI inflation, food inflation, administered inflation, and expected inflation. The study analyzes monthly data covering the period from January 1995 to February 2011. For comparative purposes and more enriching discussions, the period of analysis is being divided into various sub-periods, namely: (1) pre-crisis period - January 1995-December 1996; (2) during crisis period I - January 1997-December 1998; (3) post-crisis period - January 1999-December 2006, and (4) during crisis period II – January 2007-February 2011. In the methodology, the study relies on the Vector Auto Regression. Additionally, to determine the inter-relationship among the variables, innovation accounting of variance decomposition analysis is also adopted. The study finds that when the main three conventional sources of inflation of fiat money, interest rate and exchange rate are replaced by their Islamic counterparts variables of Islamic money, PLS return, and gold price, the rate of inflation drops significantly. In addition, the study provides empirical evidence that the conventional variables of fiat money, interest rate and exchange rate contribute significantly in explaining the variations of inflation in Malaysia. Based on the findings, the study concludes that increasing the share of PLS-based Islamic finance and relying on gold in the payment system would contribute towards greater price stability in the economy. Thus, there is a need to reduce the dependency on the riba-based system as the study has empirically shown that the riba-based system is inflation generating and would lead to macroeconomic instability
format	Conference or Workshop Item
author	Wiranata Kusuma, Dimas Bagus Kassim, Salina Fikri, Muhammad
author_facet	Wiranata Kusuma, Dimas Bagus Kassim, Salina Fikri, Muhammad
author_sort	Wiranata Kusuma, Dimas Bagus
title	Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
title_short	Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
title_full	Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
title_fullStr	Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
title_full_unstemmed	Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia
title_sort	dynamics of inflation determinants under dual monetary system: empirical evidence from malaysia
publishDate	2011
url	http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/ http://irep.iium.edu.my/25030/1/dynamics_of_inflation_determinants.pdf
first_indexed	2023-09-18T20:37:25Z
last_indexed	2023-09-18T20:37:25Z
_version_	1777409139185549312

Dynamics of inflation determinants under dual monetary system: empirical evidence from Malaysia

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