The Effect Of Oil Prices On Output: Evidence From Indonesia

The study investigates the effect of changes in world oil prices and Indonesia’s output. Some methods in time series data analyses have been employed among variables: real gross domestic products, real oil prices, government final consumption expenditure, and trade openness. The first two variables are the main variables investigated, while two others are control variables. The methods employed are cointegration analysis, Granger Causality test with ECM, and dummy variable of net oil-importer periods and interaction variables inserted into he models. The empirical results show that among variables exists cointegration, observing that the variables have long run relationship. In addition, the Granger Causality test shows that there is unidirectional causality from oil prices to Indonesia’s GDP, therefore, this unidirectional causality can be used to measure the effect in short run and long run. The results prove that there is different effect in the long run and in the short run, whilst in the short run the effect is positive and in the long run is negative. However, when dummy variable of net-oil importing periods and its interaction with oil prices are inserted to the models, the results shows that the effects of oil prices during net-oil importer periods is not conclusive. Future studies should employ other variables that are also important for Indonesia’s output, for instance other macroeconomic variable or other determinants such as democracy or investments, etc, in order to obtain better results.