The Impact of oil price shocks and financial shocks on the Indonesia macroeconomy

AJI, Dwi Dermawan Setia, Prof. Koji Kawabata

2010 | Tesis | S2 Ilmu ekonomi

While the oil price shocks effect debates are continuing, the bubble economies in recent decades indicate the possibility that stock price shocks are a competing alternative to explain fluctuations in the economy. Study on Indonesian case regarding the issue is essential due to Indonesian state as a small open economy, which poses a marginal net oil exporter as well as an emerging financial market This study examines long run relationships among oil price shocks, financial shocks and macroeconomic indicators, by addressing particular questions of whether oil price and financial shocks have adverse effects on the economy; and whether it is the oil price shocks or the financial shocks which cause the larger economic effects in Indonesia. The study was conducted by employing time series analysis, namely vector error correction model, impulse response, variance decomposition and the Granger causality test. The vector error correction model found that output and inflation each had positive long run relationships with exchange rates and stock prices, but they had long run negative relationships with oil prices. While, the forecast of the impulse response suggested that the output responded positively to both oil price shocks and financial shocks, and both inflation and exchange rates responded negatively to both oil price shocks and financial shocks. The variance decomposition, in line with impulse response analysis, provided evidence that oil price shocks had larger impacts on the Indonesian macroeconomy than that of financial shocks. Moreover, the Granger causality analysis suggested that oil price and financial shocks indirectly affect output through inflation and exchange rates,

Kata Kunci : Oil price shocks,Financial shocks,Macroeconomy,VEctor error correction model,Impulse response,Variance decomposition