Provincial Inflation Dynamics in Indonesia: Hybrid New Keynesian Phillips Curve Approach

Abstract

This paper attempts to analyze the provincial inflation dynamics in Indonesia by utilizing Hybrid New Keynesian Phillips Curve and recent developments in econometric panel data approaches. The approaches follow relevant theory, using dynamic panel data analysis and GMM estimation. In general, the previous studies of inflation dynamics in Indonesia using national data may have some drawbacks because the results tend to be dominated by the behavior of inflation in Java. The results of this study are expected to be able to represent the inflation dynamics in all of provinces in Indonesia. The findings show that the approach can be utilized to estimate the inflation dynamics in Indonesia. The empirical results also indicate that formations of inflation expectations are determined by past- and future- inflation. In other words, the provincial inflation dynamics in Indonesia are dominated by the forward-looking behavior of economic agents. The estimated parameters of the backward-and forward looking behaviors are relatively lower than those of the previous studies. Those may be resulted by the use of national data instead of provincial data in the previous studies. It is suggested that our economic agents respond quickly to the credible policies introduced by government and future information.