The impact of domestic fuel price shocks on the manufacturing sector of Indonesia

WAGIYANTO, Henri, Prof. Toyohiko Matsubara

2009 | Tesis | S2 Magister Ekonomika Pembangunan

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This study examines the transmission mechanism of domestic fuel price shocks in the Indonesian economy by analyzing the effects on consumer prices, monetary policy and the manufacturing industry. The impulse response function, variance decomposition functions and Granger causality test of the unrestricted Vector Autoregression are employed to assess the impact of domestic fuel price shocks on consumer prices, discount rate, money supply and output of manufacturing industry both in aggregate and in sub sectors. The sample periods used are the long period sample including Indonesian economic crisis (1994:01-2008:06) and the short period sample of post-Indonesian economic crisis (1999:07-2008:06). The VAR estimation results show that in both samples, given a domestic fuel price increase, the commodity and service prices also increased. The increase in the discount rate after the domestic fuel price shocks showed that Bank Indonesia, as the monetary authority, preferred to mitigate the impact of domestic fuel price shock and inflation by implementing the tightening policy. Money supply has declined by the indirect impact of the contraction policy. When the economy became stable, as shown by the low inflation, the monetary authority applied the expansionary policy to attract investment and to pursue the economic growth. The Granger causality tests illustrate that after the Indonesian economic crisis period, macroeconomic variables, such as consumer price, discount rate and money supply showed more significant causal relationship each other than the period including Indonesian economic crisis. After the Indonesian economic crisis period, the decline of total manufacturing output was not directly influenced by domestic fuel price shocks, but it was due to Bank Indonesia implementing the contractionary policy. The output of the manufacturing industry showed generally negatively responses to domestic fuel price shocks, which effect was more significant in the long period sample than in the short period one. The Indonesian economic crisis and financial losses in 1997-1998 also played an important role on the economic downturn, so that the slight increase of domestic fuel price would have significant impact to the decline of output of the manufacturing industries. Manufacturing sub sectors have different patterns of response to the domestic fuel price shocks. Based on the impulse response functions and variance decomposition functions of unrestricted VAR, the outputs of motor vehicle and trailers, tobacco, and wood and wood products, were significant negatively affected by the domestic fuel price shocks. On the other hand, the outputs of food and beverages, coal and petroleum product, and radio, television and communication equipment were significant positively affected by domestic fuel price shocks. The other manufacturing industries were not significantly influenced by domestic fuel price shocks.

Kata Kunci : Domestic fuel price shocks,Monetary policy,Vector autoregression,Manufacturing sector