The Persistence of the Food Price Change in Response to Fiscal, Monetary, and Natural Factors’ Shocks in Indonesia

The subject of the study is the dynamics of food prices and their variations influenced by internal and external factors. This study assesses the impact of rainfall, fuel prices, and interest rates on food price fluctuations and analyzes the relative contributions of these variables. This study aims to determine the extent to which internal (intrinsic) factors and external (exogenous) factors contribute to variations of food prices, determine the relative dominance of each factor, and provide policy recommendations to stabilize food prices. This study uses a method of the Vector Error Correction Model with exogenous variables (VECMX) to analyze the dynamic relationship between endogenous variables (food inflation) and exogenous variables, such as interest rates, rainfall, and fuel prices. The relevance of this study is to provide insight into the factors that influence the dynamics of food prices, which can be used as a basis for formulating a policy of food price stabilization. The results showed that the persistence of changes in food prices is relatively high if it is affected by shocks from fiscal policy factors, monetary policy, and natural factors. The average food price change takes about 20–30 months to return to its natural value (new equilibrium) after receiving a shock. Most variations in food prices (more than 70%) are influenced by internal factors. After a certain period, the impact of fuel prices becomes more dominant than rainfall and the benchmark interest rate has the least effect.

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