Decentralization and Regional Inflation in Indonesia

Tirtosuharto, Darius and Adiwilaga, Handri (2013): Decentralization and Regional Inflation in Indonesia. Published in: Bulletin of Monetary Economics and Banking , Vol. 16, No. 2 (October 2013): pp. 137-154.

Abstract

The link between decentralization and inflation as one of the key aspects of macroeconomic stability has been surveyed by a number of studies and the findings are generally inconclusive. Using sample data of developing and developed countries, the study found that decentralization correlates with lower inflation in developed countries and vice versa, it correlates with higher inflation in developing countries. The key question is what factors play a role in controlling inflation in a decentralized system. This paper is to argue that the coordination problem is the main issue in controlling inflation in a decentralized system, particularly in developing countries. The empirical analysis is to determine the effect of decentralization on regional inflation in Indonesia and whether institutions play a role in the recent downward trend of inflation in Indonesia. A panel data that includes 33 observations of the Indonesian regions (provinces) is constructed with a dummy variable representing the existence of institution. In addition, this study analyzes whether decentralization supports the convergence in regional inflation and also the pattern of spatial correlation in regional inflation. The assumption is that there are some degrees of collective institutional coordination and cooperation with the establishment of Regional Inflation Task Force (RITF).

• Item Type: MPRA Paper
• Language: English
• Keywords: decentralization, inflation convergence, regional institution
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H73 - Interjurisdictional Differentials and Their Effects; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity

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