INFLATION TARGETING IN INDONESIA: SEARCHING FOR A THRESHOLD

It could be argued that for some developing countries, low to moderate inflation is beneficially related to economic growth and that it is only after a certain threshold level that inflation becomes deleterious to growth. This has implications for macroeconomic policy requirements placed on developing countries by international loan bodies. This paper, using data from Indonesia, examines the relationship between growth and inflation. Particularly, a threshold VAR model is used to test for changes in the relationship between inflation and growth. The results so far are exploratory and limited by a small data sample. The results are consistent with a threshold level between 8.5% and 11% producing structural shifts in the relationship between inflation and growth.