English Version
I. INTORDUCTION
Since the beginning of the Decentralization era, the regional issue has been crucial in the Indonesian policy. It is Obvious that the size and the geography of the country lead to emphasize the role of the regions. Moreover, Indonesia has very hierarchical administrative organization. The impact of the relaxation of the central government control gave a more responsibilities to the regions. The reform has altered the relationship between center and regions since the rule of government on the Law 22 / 1999 about regional government and the rule of government on the Law 25 / 1999 about the balance of financial central government and regional government. There are several implications, first, the central government has moved from the controlled policy through direct administration of the economy, to the form of macro-economic management (Goodman and Segal, 1994). Second, the fiscal relationship between the center and the regions changed drastically, and gives a higher power to the regions (Brun, 2002).
Since the beginning of the Decentralization era, the regional issue has been crucial in the Indonesian policy. It is Obvious that the size and the geography of the country lead to emphasize the role of the regions. Moreover, Indonesia has very hierarchical administrative organization. The impact of the relaxation of the central government control gave a more responsibilities to the regions. The reform has altered the relationship between center and regions since the rule of government on the Law 22 / 1999 about regional government and the rule of government on the Law 25 / 1999 about the balance of financial central government and regional government. There are several implications, first, the central government has moved from the controlled policy through direct administration of the economy, to the form of macro-economic management (Goodman and Segal, 1994). Second, the fiscal relationship between the center and the regions changed drastically, and gives a higher power to the regions (Brun, 2002).
The power transition may greatly influence the monetary policy regarding the link between the direct link between the central bank and the local government. The Bank of Indonesia now is more difficult to control regional inflation in Indonesia because each region has a more various power to influence the regional inflation. The occurrence of a currency and the trade area which integrate all regional markets should theoretically guarantee the convergence of inflation rates across participating regions. In this context, some of the broadly known impediments to the purchasing power parity to hold will disappear. The factors like the trade barriers, the nominal exchange rates fluctuation and the transportation cost are now nil or negligible.
Because the heart of decentralization is giving a higher role on the district or the municipal level, then we should investigate the inflation dispersion at this level. In this paper, we raise the issue of the inflation dispersion across regions in East Java Indonesia and its implication for the Central Bank of Indonesia policy in several ways. First, we will shed some light on the dynamics of the regional inflation rates by testing the existence and the degree of their mean reverting behavior. This allows us to address the issue of whether the existing of cross-regional differentials should be a major issue for the policy makers. Particularly we are interested whether overall dispersion has decreased over time (B-convergence) or not.
The rest of the paper is organized as follows; section 2 will discuss the theoretical review about the price level convergence. Section 3 will highlight the data and the methodology. Section 4 gives the result and the sensitivity analysis, while the conclusion will be the last session.
Journals for full download on the link below
Because the heart of decentralization is giving a higher role on the district or the municipal level, then we should investigate the inflation dispersion at this level. In this paper, we raise the issue of the inflation dispersion across regions in East Java Indonesia and its implication for the Central Bank of Indonesia policy in several ways. First, we will shed some light on the dynamics of the regional inflation rates by testing the existence and the degree of their mean reverting behavior. This allows us to address the issue of whether the existing of cross-regional differentials should be a major issue for the policy makers. Particularly we are interested whether overall dispersion has decreased over time (B-convergence) or not.
The rest of the paper is organized as follows; section 2 will discuss the theoretical review about the price level convergence. Section 3 will highlight the data and the methodology. Section 4 gives the result and the sensitivity analysis, while the conclusion will be the last session.
Journals for full download on the link below
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