The Dynamics of Indonesia Inflation: What Can We Learn From Inflation Disaggregation?

Abstract

This paper employs disaggregated data of inflation combined with Factor Augmented Vector Auto Regression (FAVAR) to explore the price behaviour in Indonesia. The main finding of this analysis is that price behaviour in Indonesia exhibits heterogeneity. It is evident not only in terms of the magnitude, but also in the direction and the speed of adjustment to the new equilibrium in response to interest rate shock. Price volatility is mainly related to sector specific shocks instead of macroeconomic shocks. Another finding is, the price puzzle weakens once ITF is adopted. Keywords: price disaggregation, inflation, FAVAR, price puzzle.JEL classification: C32, E31, E52