ENERGY SUBSIDY AND PRICE DYNAMICS IN INDONESIA

Abstract

The downward trend of the world oil prices in recent years has put profound consideration among countries to reform the energy subsidy policies. Examination of the inflationary impact of the reform has become essential due to possible welfare consequences. This study aims to reveal the impact of energy subsidy on the prices in Indonesia by utilizing the autoregressive distributed lag (ARDL) method to capture short-run dynamics and long-run cointegration between dependent and independent variables in the period 1980-2017. The finding of this research indicated that the impact of the energy subsidy is significant for the short-run and the long-run periods. Regarding the result, the government of Indonesia is advised to reform carefully by applying energy subsidy policy gradually and protecting vulnerable poor households.