Factors Influencing the Success of Currency Redenomination: Historical and Experimental Approach

Abstract

Redenomination is a simplification of nominal value of currency by reducing digit (zero number) without reducing the real value of the currency. Factors Influencing the Success of Currency Redenomination is a research about whether the economic conditions at the time of redenomination, such as inflation and economic growth, may affect the success of currency redenomination implementation. The success of redenomination can be seen from changes on the level of inflation and economic growth after the redenomination policy is applied. This research is useful for central bank and government to provide inputs in the preparation of the Rupiah Price Changes Draft Law, especially in terms of timeliness of redenomination policy implementation. This study has three objectives that include the following: (1) to examines the factors that affect the successful of currency redenomination implementation in a country; (2) to analyze the effect of redenomination policy on changes of selling prices, number and value of transactions in the market in a variety of different economic conditions; and (3) to assess public perceptions, as producers and consumers, toward Rupiah redenomination policy. This research was based on primary and secondary data. Primary data obtained through simulation experiments of buying and selling rice. The primary data used are responses of 48 experimental subject as economic actors in the experiments. In addition, primary data were also obtained through a survey of 168 respondents. Secondary data used are historical data economic indicators of 30 countries that have been redenominated their currencies from 1963 to 2008. Multiple regression model is used to examine the factors that affect the successful of currency redenomination implementation. Meanwhile, primary data generated through experimental design were analyzed using different test mean values of two independent populations. Afterward, descriptive analysis is used to describe the public perceptions of redenomination policy. Multiple regression model indicates that the successful of redenomination tends to be influenced by economic conditions when a country implements its currency redenomination. Countries that implement redenomination when inflation rate was low (<10%), then inflation rate one year thereafter will be lower than countries that implement redenomination when inflation rate was high (≥10%). Meanwhile, inflation will decrease and economic growth will rise higher after redenomination, if previously a country have experienced high economic growth as well. Based on experimental results of buying and selling rice, when inflation was high, redenomination policy could increase the selling price. Otherwise, when inflation was low, redenomination could decrease the selling price. Changes in selling price after redenomination was not affected significantly by differences in economic growth conditions. In different economic conditions, redenomination policy did not significantly affect the changes number of transactions and total value of transactions in the market. From the survey results, public did not believe government can control inflation after redenomination. Redenomination also will not affect consumption pattern and public is not too convinced redenomination can strengthen the Rupiah exchange rate. The important thing on currency redenomination is economic conditions at the time of policy implementation. It would be better if redenomination implemented when the economy is in good and stable condition, such as low inflation rate and high economic growth.