Nopirin Nopirin(1*)

(1) Universitas Gadjah Mada
(*) Corresponding Author


Before deregulation 1983 the monetary sector was dominated by the government bank Controlling money supply is directly influenced by Bank Indonesia, so as the interest rate and commercial bank ceiling credit. About 85% of banking assets was dominated by the state bank.

Banking deregulation 1983 resulted in a more flexible banking sector. Ceiling credit was abolished and interest rates become market determined. As a result funds mobilization increased, more variety of banking product and competition is getting keen.

The banking development has led a dramatic change in the demand for money. Using a fairly standard money demand model, this study attempt to analize:

a. Whether there is a liquidity trap (as indicated by high interest elasticity of money demand)

b. Whether there is also an economies of scale of holding money

c. Stability of the demand for money

Using data for the period 1975 - 1996 and then disagregated into before and
after deregulation, the empirical results arc:

a. For the periode 1975 - 1996 interest rate was significance factor affecting
demand for money and the elasticity is greater than one especially after
deregulation.  This indicate that there is a liquidity trap, so that fiscal policy is
more effective.

b.  There is also an economies of scale as indicated by less elastic demand for
money with respect to income.   The reason is that a rapid development in the
payment system, such as the use of credit card.

c.  Finally,  using Chow-test shows thai the demand for money is unstable.  The
implication is that real sector policy is more appropriate than monetary policy.

Full Text:



Goldfeld, S.M & Chandler, L.V., The Economics of Money and Banking, New York, Harper & Row, Publishers, 1991, p. 289-290.

Baumol, W.J. "The Transaction Demand for Cash: An Inventory Theoritic Approach" Quarterly Journal of Economics, November, 1952, p. 45-46.

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Laidler, D.E, The Demand for Money, Theories and Evidence, New York: Harper & Row, Publisher, 1992, p. 140-145.

Nopirin, Ekonomi Moneter Buku I, Edisi 4, BPFE - Yogyakarta, 1996, Hal. 171-172.

Thorn R.S, Monetary Theory and Policy, Philadelphia, University Press of America, 1986, p. 189-190

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