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THE DETERMINANTS OF INFLATION: AN ASEAN PERSPECTIVE
Abstract: Countries around the world are progressively adopting inflation-targeting policies in achieving their primary objective of maintaining price stability. This paper is primarily interested in the determinants of inflation and looks at a few selected Southeast Asian economies, namely Singapore, Malaysia and Indonesia to study this phenomenon. The ASEAN economies share similar financial and sectorial landscapes and are affected by common regional shocks. The independent variables that were chosen include money supply (M2), oil prices and nominal exchange rate while the selected dependent variable was inflation. This paper utilised the Ordinary Least Squares (OLS) regression method in determining the significance of the independent variables in causing inflation. The serial correlation test, heteroscedasticity test and unit root test were also employed in order to discover the properties of data collected from The World Bank. Overall, the results have found that money supply (M2) is a significant predictor for inflation across all three studied countries, in agreement with Milton Friedman’s proposition that “Inflation is always and everywhere a monetary phenomenon”. Oil prices have been found to be a significant predictor of inflation only in Singapore and Indonesia, most probably due to their net oil importer status. Nominal exchange rate has also been found to yield disappointing results.
Key words: Inflation, money supply, oil price, exchange rate