DO OIL PRICE FLUCTUATIONS AFFECT THE INFLATION RATE IN INDONESIA ASYMMETRICALLY?

Changes in the oil price directly affect production costs, and subsequently, the general price level of products. With Indonesia observing an inflation targeting policy, this study applies the nonlinear autoregressive distributed lag (NARDL) technique to investigate the effect of oil price fluctuati...

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Bibliographic Details
Published in:Singapore economic review 2022-06, Vol.67 (4), p.1333-1353
Main Authors: GOH, LIM THYE, LAW, SIONG HOOK, TRINUGROHO, IRWAN
Format: Article
Language:English
Subjects:
Central banks
Crude oil prices
Deviation
Economic theory
Inflation
Inflation rates
Inflation targeting
Petroleum
Petroleum production
Price indexes
Price levels
Production costs
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Summary:Changes in the oil price directly affect production costs, and subsequently, the general price level of products. With Indonesia observing an inflation targeting policy, this study applies the nonlinear autoregressive distributed lag (NARDL) technique to investigate the effect of oil price fluctuations in Indonesia. The relationship is important for the central bank to gauge the effectiveness of the inflation targeting policy in immunizing the country from oil price fluctuations. Our findings have revealed that there was an asymmetric behavior between oil price and the inflation rate (producer price index), thus questioning the effectiveness of the inflation targeting policy. More specifically, in the long run, an increase in the oil price will tend to lead to an increase in the rate of inflation with a greater deviation, while an oil price reduction will lead to a decrease in the inflation rate with a lower deviation. This suggests that the benefits of an oil price reduction are not passed down to the consumer.
ISSN:0217-5908
1793-6837
DOI:10.1142/S0217590820460030