A COINTEGRATION ANALYSIS OF INFLATION BEHAVIOUR IN SOUTHEAST ASIA

Abstract

The objective of this study is to investigate the long-run relationship between inflation and its determinants in the five selected Southeast Asia economies. The sample countries are Malaysia, Indonesia, Thailand, the Philippines, and Singapore. More specifically, this study has considered the different effects of final demand components on inflationary process by further disaggregating the real income variable into final consumption expenditure, expenditure on investment goods, and exports, as explanatory variables. Other factors are money supply and import prices. From the estimates, the elasticities of final demand components are different for the examined economies, and this reveals that different final demand components have different effects on inflation or domestic price determination. The results of cointegration tests have showed domestic price and its determinants are cointegrated for the three of the five selected Southeast Asia economies, that are Malaysia, Singapore, and Thailand. For the cases of Indonesia, and the Philippines, domestic price is not cointegrated with its determinants. Inflation or domestic price in the five Southeast Asia economies is inelastic to its determinants even in the long-run. This study further shows that in the long-run, import price is still major determinant of inflation or price behaviour in Malaysia, Thailand, and Singapore. By the end of this study, several discussions on economic implications have been made accord with the findings of this study.