FINANCIAL DEREGULATION AND DEMAND FOR MONEY IN INDONESIA

Abstract

A stable money demand plays important role to conduct monetary policy as it enables a policy-driven change monetary aggregates to have predictable influences on output, interest rate and price. However, financial deregulation and financial innovation lead to break relationship between money demand, income and interest rate. This paper examines the factors underlying financial deregulation and investigates the implications of such deregulation to money demand stability in Indonesia. The findings show that the relationship between money demand and income is still stable, even though the relationship tends to be lessened. Money demand instability resulted from financial deregulation was transitory and did not have permanent effect.