INFLATION CONNECTEDNESS NETWORK IN INDONESIA

Abstract

Our investigation delves into the interregional inflation interconnectedness and its ramifications within the Indonesian economy, adopting a Connectedness network framework. Methodologically, we employ a time series analysis utilizing the Generalized Vector Autoregressive (VAR) model, specifically the Koop, Pesaran, Potter, and Pesaran, Shin (KPPS) H-step ahead error variance decomposition model. The crux of our inquiry lies in the quantification of the total inflation spill over index in Indonesia, which we ascertain to be 78.24%. This empirical finding underscores a substantial spillover effect across the six provinces over the entire observational period. Notably, our analysis highlights Java, Sulawesi, Kalimantan, and Balinusra as pivotal regions acting as transmitters within the Connectedness Network Inflation in Indonesia. These findings carry implications for policymaking, advocating for governmental attention towards the determinants of stability in interregional inflation rates, particularly emphasizing the role of physical infrastructure connectivity.