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Do Oil Price Fluctuations Affect The Inflation Rate In Indonesia Asymmetrically?

Author

Listed:
  • LIM THYE GOH

    (Department of Economics, Faculty of Economics & Administration, University of Malaya, Jalan Universiti, 50603 Kuala Lumpur, Malaysia2Wilayah Persekutuan Kuala Lumpur, Malaysia)

  • SIONG HOOK LAW

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia)

  • IRWAN TRINUGROHO

    (Faculty of Economics and Business, Universitas Sebelas Maret, Jebres, Surakarta, Jawa Tengah 57126, Indonesia)

Abstract

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.

Suggested Citation

  • Lim Thye Goh & Siong Hook Law & Irwan Trinugroho, 2022. "Do Oil Price Fluctuations Affect The Inflation Rate In Indonesia Asymmetrically?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 67(04), pages 1333-1353, June.
    • Handle: RePEc:wsi:serxxx:v:67:y:2022:i:04:n:s0217590820460030
    DOI: 10.1142/S0217590820460030
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    Citations

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    Cited by:

    1. Mirza, Nawazish & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Boubaker, Sabri, 2023. "Exchange rate pass-through and inflation targeting regime under energy price shocks," Energy Economics, Elsevier, vol. 124(C).

    More about this item

    Keywords

    Inflation targeting; oil price; asymmetric cointegration; Indonesia;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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