Broad and Narrow Money Demand and Financial Liberalization in Indonesia, 1980Q1–2004Q4

This paper investigates broad and narrow money demand equations for Indonesia for the period 1980Q1–2004Q4, during which many financial liberalizations took place and the financial crisis developed in Asia in the mid–1997. Using the autoregressive distributed lag (ARDL) approach to cointegration we find that broad and narrow money demand equations are cointegrated. CUSUM and CUSUMSQ tests reveal that the narrow money (M1) demand equation is stable, whereas the broad money (M2) demand equation is not. Finally, we find that financial liberalization and the Asian financial crisis had an impact on the short-run dynamics of the money demand equations