The Impact of International Crude Oil Prices on the Monetary Sector in Indonesia

Abstract

Volatility in international crude oil prices can have a significant impact on economic stability and potentially disrupt the achievement of sustainable development goals. This research aims to identify the impact of international crude oil prices on Indonesia's monetary sector. The study utilized monthly secondary data from 2017:01-2022:11 and employed a Vector Error Correction Model for analysis. The variables used were International Crude Oil Prices, Inflation, Exchange Rates, and Consumer Expectations Index. The novelty of this research is the inclusion of consumer expectations as a variable. The results show that there is cointegration between the variables, and a reciprocal connection occurs between Exchange Rates and International Crude Oil Prices. The Impulse Response Function analysis indicates that changes in International Crude Oil Prices have a long-term impact on Inflation, Exchange Rates, and Consumer Expectations Index. Based on Forecast Error Variance Decomposition analysis, changes in the International Crude Oil Prices will have a significant impact on Inflation and Exchange Rates. In terms of sustainable development, the increasing crude oil prices may lead to greater consumption of renewable energy through substitution behavior. Mitigation policies can be prepared for both the short and long term phases.