GLOBAL ENERGY SHOCKS, EXCHANGE RATE PASS-THROUGH, AND ADMINISTERED INFLATION DYNAMICS IN INDONESIA: A VECM APPROACH

Abstract

This study investigates the dynamic interactions between global energy prices, exchange rate fluctuations, and administered inflation in Indonesia during the 2015–2025 period using the Vector Error Correction Model (VECM). Indonesia is selected as the research location because it is one of the largest emerging economies in Southeast Asia with substantial dependence on imported energy and a government-administered pricing and energy subsidy system. These conditions create a distinct inflation transmission mechanism compared to fully market-based economies. This study addresses the research gap in administered inflation literature, where previous studies predominantly focus on headline inflation and rarely examine the simultaneous effects of multiple global energy shocks within a subsidy-mediated pricing framework. Monthly time-series data include administered inflation, WTI/Brent crude oil prices, crude palm oil (CPO) prices, Dorian LPG Ltd stock prices as a proxy for global LPG market dynamics, and the Rupiah–USD exchange rate.

The results reveal a significant long-run equilibrium relationship among administered inflation, global energy prices, and exchange rate dynamics. Short-run analysis indicates that oil prices exhibit a negative coefficient, reflecting the moderating role of energy subsidies and administered pricing policies, while exchange rate depreciation and CPO prices positively influence inflation. The significant error correction term confirms a relatively rapid adjustment toward equilibrium. IRF and FEVD analyses show that exchange rate and global oil shocks are the dominant sources of inflation volatility, although their impacts are moderated by domestic policy interventions. The novelty of this study lies in the integration of oil, CPO, LPG, and exchange rate variables within a unified VECM framework, as well as the introduction of a financial logistics indicator to represent global LPG market dynamics. This study contributes to the imported inflation literature by emphasizing the importance of subsidy-mediated pricing systems in shaping inflation dynamics in emerging economies.