Flexible Inflation Targeting and Inflation Persistence in Indonesia: The Traditional Univariate and Fractional Integrated Univariate Approaches

Abstract

Purpose of the study: The high degree of inflation persistence will impact the Indonesian economy. The purpose of this study is to determine the degree of inflation persistence in Indonesia following the adoption of a flexible Inflation Targeting Framework (ITF). Methodology: Traditionally integrated univariate and fractional approach will be carried out in this research. The inflation variables used are core inflation, administered price inflation, volatile inflation, and general inflation. The data used is from 2014M1 to 2019M2. Main Findings: After data analysis, the researchers found that high persistence behaviors are found, especially in the core, administered, and volatile inflation, following the flexible adoption of the ITF. The time it takes for inflation to return to equilibrium is 1 to 8 months for each group. Applications of this study: The result is important for the highest authorities in improving their policy. Structural improvements through monetary policy based on inflation expectations, increasing the transparency of food prices, and synergy with Central as well as Regional Inflation Control is suggested for the authorities. Novelty/Originality of this study: This study presents a different perspective of research within the inflation topic. It takes the recent policy implementation of a country and analyses its effect. To the best of the authors knowledge, this research is the first to explain the effect of the Inflation Targeting Framework on Indonesia's inflation condition.