Povincial Inflation Dynamics in Indonesia: Hybrid New Keynesian Phillips Curve Approach

In general, the previous studies analyze the inflation dynamics in Indonesia using national data which may have some weaknesses because the results tend to be dominated by the behavior of inflation in Java. It is expected that the results of this study can represent the inflation dynamics in the whole provinces of Indonesia. This paper attempts to analyze the provincial inflation dynamics in Indonesia for the period of 2005 (III) -2013 (III) by utilizing Hybrid New Keynesian Phillips Curve (HNKPC) theory and recent developments in econometric analysis of data panel. The approaches follow relevant HNKPC theory, using dynamic (backward- and forward- looking) data panel analysis and Generalized Method of Moment (GMM) estimation. The findings show that HNKPC approach can be utilized to estimate the inflation dynamics in the whole provinces of Indonesia. The empirical results also indicate that formations of inflation expectations are determined by past and future inflation. In other words, the provincial inflation dynamics in Indonesia are dominated by the forward-looking behavior of economic agents. The estimated parameters of the backward- and forward-looking behavior are relatively lower than those of the previous studies. Those may be because the previous studies use national data instead of provincial data. It is suggested that our economic agents respond quickly to the credible policies introduced by government and future information.