OIL PRICE TRANSMISSION TO INFLATION IN INDONESIA: SVAR ANALYSIS
Keywords:
Oil Price, Exchange Rate, Inflation, SVAR, IndonesiaAbstract
The transmission of global oil price shocks to inflation in Indonesia is examined using a Structural Vector Autoregression (SVAR) model estimated with monthly data covering the period from 2010 to 2024. Prior to estimation, the validity and robustness of the model are ensured through a series of preliminary tests, including stationarity, optimal lag selection, and stability testing. The analysis considers both the direct effect of oil price shocks on inflation and the indirect effect transmitted through exchange rate movements. The estimation results reveal that fluctuations in global oil prices significantly affect the exchange rate, while only a weak and statistically insignificant direct impact is observed on inflation. A stronger response is instead identified when inflation is exposed to exchange rate shocks, indicating that exchange rate pass-through represents the primary transmission mechanism in Indonesia. Consistent with these findings, the Impulse Response Function (IRF) analysis shows that the exchange rate responds positively during the initial periods following an oil price shock, whereas the adjustment of inflation occurs more gradually through exchange rate fluctuations over time. Overall, the findings suggest that the influence of global oil price shocks on inflation is transmitted predominantly through the exchange rate rather than through a direct channel, highlighting the importance of exchange rate stability in reducing inflationary pressures arising from external shocks in an open economy such as Indonesia.
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