Do Oil Price Fluctuations Affect the Inflation Rate in Indonesia Asymmetrically?

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.

Investigating the Impact of Institutional Quality Under the Petroleum Price Deregulation Policy Regime on the Economic Growth of an Emerging Economy

“…Again, we observe that in the very short run inflation impacts negatively on GDP growth. Our results support that of (Goh, 2022;Akinsola and Nicholas, 2020;Mork et al, 1989 andBrinin et al, 2016). Our findings on foreign direct investment show that in the very short run foreign direct investments increases the rate of growth of GDP but do not have any significant effect on GDP growth in the long run.…”

“…Using GMM model for 113 economies, Khan and Hanif (2020) found that institutional quality affects economic while they found a negative relationship between inflation and economic growth. Goh et al (2022) observed an asymmetric behaviour between inflation and petroleum prices which in turn impacts negatively on economic growth. Similarly, using GMM approach for North African countries to examine the connection between economic growth and institutional quality, Boujelbene (2021) observed a non-linear nexus among the variables while inflation had a negative effect on economic growth.…”

Do Petroleum Price Asymmetries and Price Deregulation Cause Business Cycles in Ghana?

“…Gylych et al (2020) found oil prices as a strong determinant factor of exchange rate, cost of borrowing and inflationary tendencies. Again, Goh et al (2022) found an asymmetric behaviour between oil price and inflation rate and that increase in oil prices in the long run increases inflation.…”

Central Bank Independence and Oil Prices Impact on Macroeconomic Indicators

“…Many studies pay attention to the asymmetric impact of oil prices on inflation. Goh et al (2022) indicate that in Indonesia, in the long run, an increase in oil price tends to increase the inflation rate with a larger deviation, and a decrease in oil price tends to reduce the inflation rate with a smaller deviation. On this basis, they conclude that consumers do not benefit from lower oil prices.…”