Investigating inflation dynamics in Indonesia: Identifying the inflation spillover for enhancing regional inflation control
Keywords:
direct and indirect effect, inflation, non-linear model, semiparametic model, spatial spillover
Abstract
This study employs a hybrid New Keynesian Phillips curve (NKPC) model, comprising the dynamic panel, spatial dynamic panel, and semiparametric spatial dynamic panel models, to examine the dynamics of regional inflation in Indonesia from Q1 1997 to Q2 2023. The latter model, which employed the inverse distance weight (IDW), was identified as the most optimal model. The findings indicated that the lagged inflation and output gap variables transmitted a notable impact on regional inflation of Indonesia. Furthermore, the significance of the spatial spillover parameters indicates the existence of spatial regional inflation spillover in Indonesia. Jakarta, Central Java, and East Java represent the three most significant focal points of inflation dynamics in Indonesia, exerting the greatest influence on other regions. While, South Kalimantan, Jakarta, and East Java were the top three regions experiencing the greatest impact from inflationary pressures originating elsewhere. Through sensitivity analysis, it was found that a flattened Phillips curve was present throughout the period under study. It is therefore recommended that policies be intensified with a view to controlling prices, strengthening policy synergies, and improving the efficiency of goods distribution channels, both for the focal point and for regions experiencing inflationary pressures as a result of spillovers.
Keywords: direct and indirect effect; inflation; non-linear model; semiparametric model; spatial spillover
JEL Classification: C31; E31; F36
References
[1] Aginta, H. (2023) ‘Inflation and Spatial Spillovers in a Large Archipelago: Evidence from Indonesia’, Economic Papers, pp. 1–13. Available at: https://doi.org/https://doi.org/10.1111/1759-3441.12381.
[2] Al-Nassar, N.S.. and Albahouth, A.A. (2023) ‘Inflation Spillovers among Advanced and Emerging Economies: Evidence from the G20 Group’, Economies, 11(4). Available at: https://doi.org/https://doi.org/10.3390/economies11040126.
[3] Anselin, L., Syabri, I. and Kho, Y. (2010) ‘GeoDa: An Introduction to Spatial Data Analysis’, in In: Fischer, M., Getis, A. (eds) Handbook of Applied Spatial Analysis. Berlin, Heidelberg:
[4] Auer, R., Levchenko, A.A. and Saure, P. (2021) ‘International Inflation Spillovers Through Input Linkages’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/https://doi.org/10.2139/ssrn.2952281.
[5] Bank Indonesia (2022) Laporan Perkembangan Ekonomi Keuangan dan Kerja Sama Internasional.
[6] Bank Indonesia (2023) Kajian Ekonomi dan Keuangan Regional Laporan Nusantara Juli 2023.
[7] Basarac, M., Škrabic, B. and Soric, P. (2011) ‘The hybrid phillips curve: Empirical evidence from transition economies’, Finance a Uver - Czech Journal of Economics and Finance, 61(4), pp. 367–383.
[8] Bilgin, N.M. (2023) ‘Inflation Diffusion Through Production Networks’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/https://doi.org/10.2139/ssrn.4164364.
[9] Cholette, E.B.D.& P.A. (2006) Benchmarking, Temporal Distribution, and Reconciliation Methods for Time Series. Lecture Notes in Statistics. New York: Springer-Verlag.
[10] Chow, G.C. and Lin., A.-L. (1971) ‘Best linear unbiased interpolation, distribution, and extrapolation of time series by related series.’, The Review of Economics and Statistics, 53(4), pp. 372–375.
[11] Elhorst, J.P. (2014) Spatial Econometrics: from Cross-Sectional Data to Spatial Panels. Heidelberg: Springer. Available at: https://doi.org/https://doi.org/10.1007/978-3-642-40340-8.
[12] Galí, J. and Gertler, M. (1999) ‘Inflation dynamics: A structural econometric analysis’, Journal of Monetary Economics, 44(2), pp. 195–222. Available at: https://doi.org/https://doi.org/10.1016/S0304-3932(99)00023-9.
[13] Halka, A. and Szafranek, K. (2017) ‘Whose Inflation Is It Anyway? The Inflation Spillovers Between The Euro Area and Small Open Economies’, SSRN Electronic Journal, 223. Available at: https://doi.org/https://doi.org/10.2139/ssrn.2805885.
[14] Hodrick, R.J. and Prescott, E.C. (1997) ‘Postwar U.S. Business Cycles: An Empirical Investigation’, Journal of Money, Credit, and Banking, 29, pp. 1–16. Available at: https://doi.org/https://doi.org/10.2307/2953682.
[15] Istiak, K. et al. (2021) ‘The Spillover of Inflation among the G7 Countries’, Journal of Risk and Financial Management, 14(8), p. 392. Available at: https://doi.org/https://doi.org/10.3390/jrfm14080392.
[16] LeSage, J.. and Pace, K.R. (2009) Introduction to Spatial Econometrics. London: Chapman and Hall/CRC.
[17] Mínguez, R.., Basile, R.. and Durbán, M. (2020) ‘An alternative semiparametric model for
spatial panel data’, Stat Methods Appl, 29, pp. 669–708. Available at: https://doi.org/https://doi.org/10.1007/s10260-019-00492-8.
[18] Mínguez, R.., Basile, R.. and Durbán, M. (2022) ‘An introduction to pspatreg: A new R package for semiparametric spatial autoregressive analysis’, REGION, 9(2), pp. 1–15. Available at: https://doi.org/doi: 10.18335/region.v9i2.450.
[19] Ministry of Finance Republic of Indonesia (2023) Kemenkeu dan Kemendagri Beri Insentif Fiskal Untuk Daerah Berkinerja Baik dalam Pengendalian Inflasi.
[20] Monahov, A. (2023) ‘An R Implementation of the One- and Two-Sided Hodrick-Prescott Filter’, SSRN [Preprint]. Available at: https://doi.org/https://ssrn.com/abstract=4387670 or http://dx.doi.org/10.2139/ssrn.4387670.
[21] Monsell, B. (2007) ‘The X-13A-S Seasonal Adjustment Program’, in Proceedings of the 2007 Federal Committee on Statistical Methodology Research Conference.
[22] Nagayasu, J. (2017) ‘Regional inflation, spatial locations and the Balassa-Samuelson effect: Evidence from Japan’, Urban Studies, 54(6), pp. 1482–1499. Available at: https://doi.org/https://doi.org/10.1177/0042098016629915.
[23] Osorio, C. and Unsal, D.F. (2013) ‘Inflation dynamics in Asia: Causes, changes, and spillovers from China’, Journal of Asian Economics, 24, pp. 26–40. Available at: https://doi.org/https://doi.org/10.1016/j.asieco.2012.10.007.
[24] Purwono, R., Yasin, M.Z. and Mubin, M.K. (2020) ‘Explaining regional inflation programmes in Indonesia: Does inflation rate converge?’, Economic Change and Restructuring, 53(4), pp. 571–590. Available at: https://doi.org/https://doi.org/10.1007/s10644-020-09264-x.
[25] Ridhwan, M.M. (2016) ‘Inflation differentials, determinants, and convergence: Evidence from Indonesia subnational data’, The Journal of Developing Areas, 50(5), pp. 257–276. Available at: https://doi.org/10.1353/jda.2016.0030.
[26] Sax, C. and Eddelbuettel, D. (2018) ‘Seasonal Adjusment by X-13ARIMA-SEATS in R’, Journal of Statistical Software, 87(11), pp. 1–17. Available at: https://doi.org/doi: 10.18637/jss.v087.i11.
[27] Sax, C. and Steiner., P. (2013) ‘Temporal Disaggregation of Time Series.’, The R Journal, 5(2), pp. 80–87. Available at: https://doi.org/DOI:10.32614/RJ-2013-028.
[28] Tirtosuharto, D. and Adiwilaga, H. (2014) ‘Decentralization and Regional Inflation in Indonesia’, Buletin Ekonomi Moneter dan Perbankan, 16(2), pp. 137–154. https://doi.org/10.21098/bemp.v16i2.441.
[29] Yamada, I. (2016) ‘Thiessen Polygons’, in In International Encyclopedia of Geography:
People, the Earth, Environment and Technology (eds D. Richardson, N. Castree, M.F. Goodchild, A. Kobayashi, W. Liu and R.A. Marston). Available at: https://doi.org/https://doi.org/10.1002/9781118786352.wbieg0157.
[30] Yang, X., Zhang, Y. and Li, Q. (2021) ‘The role of price spillovers: what is different in China’, Empir Econ, 60, pp. 459–485. Available at: https://doi.org/https://doi.org/10.1007/s00181-020-01989-y.
[31] Yesilyurt, F. and Elhorst, J.P. (2014) ‘A regional analysis of inflation dynamics in Turkey’, Annals of Regional Science, 52(1), pp. 1–17. Available at: https://doi.org/https://doi.org/10.1007/s00168-013-0570-4.
[2] Al-Nassar, N.S.. and Albahouth, A.A. (2023) ‘Inflation Spillovers among Advanced and Emerging Economies: Evidence from the G20 Group’, Economies, 11(4). Available at: https://doi.org/https://doi.org/10.3390/economies11040126.
[3] Anselin, L., Syabri, I. and Kho, Y. (2010) ‘GeoDa: An Introduction to Spatial Data Analysis’, in In: Fischer, M., Getis, A. (eds) Handbook of Applied Spatial Analysis. Berlin, Heidelberg:
[4] Auer, R., Levchenko, A.A. and Saure, P. (2021) ‘International Inflation Spillovers Through Input Linkages’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/https://doi.org/10.2139/ssrn.2952281.
[5] Bank Indonesia (2022) Laporan Perkembangan Ekonomi Keuangan dan Kerja Sama Internasional.
[6] Bank Indonesia (2023) Kajian Ekonomi dan Keuangan Regional Laporan Nusantara Juli 2023.
[7] Basarac, M., Škrabic, B. and Soric, P. (2011) ‘The hybrid phillips curve: Empirical evidence from transition economies’, Finance a Uver - Czech Journal of Economics and Finance, 61(4), pp. 367–383.
[8] Bilgin, N.M. (2023) ‘Inflation Diffusion Through Production Networks’, SSRN Electronic Journal [Preprint]. Available at: https://doi.org/https://doi.org/10.2139/ssrn.4164364.
[9] Cholette, E.B.D.& P.A. (2006) Benchmarking, Temporal Distribution, and Reconciliation Methods for Time Series. Lecture Notes in Statistics. New York: Springer-Verlag.
[10] Chow, G.C. and Lin., A.-L. (1971) ‘Best linear unbiased interpolation, distribution, and extrapolation of time series by related series.’, The Review of Economics and Statistics, 53(4), pp. 372–375.
[11] Elhorst, J.P. (2014) Spatial Econometrics: from Cross-Sectional Data to Spatial Panels. Heidelberg: Springer. Available at: https://doi.org/https://doi.org/10.1007/978-3-642-40340-8.
[12] Galí, J. and Gertler, M. (1999) ‘Inflation dynamics: A structural econometric analysis’, Journal of Monetary Economics, 44(2), pp. 195–222. Available at: https://doi.org/https://doi.org/10.1016/S0304-3932(99)00023-9.
[13] Halka, A. and Szafranek, K. (2017) ‘Whose Inflation Is It Anyway? The Inflation Spillovers Between The Euro Area and Small Open Economies’, SSRN Electronic Journal, 223. Available at: https://doi.org/https://doi.org/10.2139/ssrn.2805885.
[14] Hodrick, R.J. and Prescott, E.C. (1997) ‘Postwar U.S. Business Cycles: An Empirical Investigation’, Journal of Money, Credit, and Banking, 29, pp. 1–16. Available at: https://doi.org/https://doi.org/10.2307/2953682.
[15] Istiak, K. et al. (2021) ‘The Spillover of Inflation among the G7 Countries’, Journal of Risk and Financial Management, 14(8), p. 392. Available at: https://doi.org/https://doi.org/10.3390/jrfm14080392.
[16] LeSage, J.. and Pace, K.R. (2009) Introduction to Spatial Econometrics. London: Chapman and Hall/CRC.
[17] Mínguez, R.., Basile, R.. and Durbán, M. (2020) ‘An alternative semiparametric model for
spatial panel data’, Stat Methods Appl, 29, pp. 669–708. Available at: https://doi.org/https://doi.org/10.1007/s10260-019-00492-8.
[18] Mínguez, R.., Basile, R.. and Durbán, M. (2022) ‘An introduction to pspatreg: A new R package for semiparametric spatial autoregressive analysis’, REGION, 9(2), pp. 1–15. Available at: https://doi.org/doi: 10.18335/region.v9i2.450.
[19] Ministry of Finance Republic of Indonesia (2023) Kemenkeu dan Kemendagri Beri Insentif Fiskal Untuk Daerah Berkinerja Baik dalam Pengendalian Inflasi.
[20] Monahov, A. (2023) ‘An R Implementation of the One- and Two-Sided Hodrick-Prescott Filter’, SSRN [Preprint]. Available at: https://doi.org/https://ssrn.com/abstract=4387670 or http://dx.doi.org/10.2139/ssrn.4387670.
[21] Monsell, B. (2007) ‘The X-13A-S Seasonal Adjustment Program’, in Proceedings of the 2007 Federal Committee on Statistical Methodology Research Conference.
[22] Nagayasu, J. (2017) ‘Regional inflation, spatial locations and the Balassa-Samuelson effect: Evidence from Japan’, Urban Studies, 54(6), pp. 1482–1499. Available at: https://doi.org/https://doi.org/10.1177/0042098016629915.
[23] Osorio, C. and Unsal, D.F. (2013) ‘Inflation dynamics in Asia: Causes, changes, and spillovers from China’, Journal of Asian Economics, 24, pp. 26–40. Available at: https://doi.org/https://doi.org/10.1016/j.asieco.2012.10.007.
[24] Purwono, R., Yasin, M.Z. and Mubin, M.K. (2020) ‘Explaining regional inflation programmes in Indonesia: Does inflation rate converge?’, Economic Change and Restructuring, 53(4), pp. 571–590. Available at: https://doi.org/https://doi.org/10.1007/s10644-020-09264-x.
[25] Ridhwan, M.M. (2016) ‘Inflation differentials, determinants, and convergence: Evidence from Indonesia subnational data’, The Journal of Developing Areas, 50(5), pp. 257–276. Available at: https://doi.org/10.1353/jda.2016.0030.
[26] Sax, C. and Eddelbuettel, D. (2018) ‘Seasonal Adjusment by X-13ARIMA-SEATS in R’, Journal of Statistical Software, 87(11), pp. 1–17. Available at: https://doi.org/doi: 10.18637/jss.v087.i11.
[27] Sax, C. and Steiner., P. (2013) ‘Temporal Disaggregation of Time Series.’, The R Journal, 5(2), pp. 80–87. Available at: https://doi.org/DOI:10.32614/RJ-2013-028.
[28] Tirtosuharto, D. and Adiwilaga, H. (2014) ‘Decentralization and Regional Inflation in Indonesia’, Buletin Ekonomi Moneter dan Perbankan, 16(2), pp. 137–154. https://doi.org/10.21098/bemp.v16i2.441.
[29] Yamada, I. (2016) ‘Thiessen Polygons’, in In International Encyclopedia of Geography:
People, the Earth, Environment and Technology (eds D. Richardson, N. Castree, M.F. Goodchild, A. Kobayashi, W. Liu and R.A. Marston). Available at: https://doi.org/https://doi.org/10.1002/9781118786352.wbieg0157.
[30] Yang, X., Zhang, Y. and Li, Q. (2021) ‘The role of price spillovers: what is different in China’, Empir Econ, 60, pp. 459–485. Available at: https://doi.org/https://doi.org/10.1007/s00181-020-01989-y.
[31] Yesilyurt, F. and Elhorst, J.P. (2014) ‘A regional analysis of inflation dynamics in Turkey’, Annals of Regional Science, 52(1), pp. 1–17. Available at: https://doi.org/https://doi.org/10.1007/s00168-013-0570-4.
Published
2025-04-24
How to Cite
Purwa, T., Dariwardani, N. M. I., & Cendekia, D. (2025). Investigating inflation dynamics in Indonesia: Identifying the inflation spillover for enhancing regional inflation control. Jurnal Ekonomi Indonesia, 14(1), 1-23. https://doi.org/10.52813/jei.v14i1.569
Section
Articles
