Do oil price fluctuations affect the inflation rate in Indonesia asymmetrically?
Document Type
Article
Publication Date
6-1-2022
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.
Keywords
Inflation targeting, Oil price, Asymmetric cointegration, Indonesia
Divisions
Faculty_of_Business_and_Accountancy
Funders
None
Publication Title
Singapore Economic Review
Volume
67
Issue
04
Publisher
World Scientific
Publisher Location
5 TOH TUCK LINK, SINGAPORE 596224, SINGAPORE