Spatial dynamics of consumer price in Indonesia: convergence clubs and conditioning factors

Abstract

This paper aims to identify convergence clubs in regional price across 34 provinces in Indonesia and investigate conditioning factors of club formation. We analyze regional monthly consumer price data from January 2012 to December 2019 with a novel club convergence test developed by Phillips and Sul (Econometerica 756:1771–1855, 2007), and show that regional consumer price does not converge into a single universal equilibrium. Instead, there are four convergence clubs identified. Further investigation shows that labor productivity, inflation expectation, consumption growth, and spatial externalities influence the convergence club formation. From a policy perspective, our findings of multiple convergence clubs and their influencing factors alert policy makers to rethink the possibility of augmenting uniform monetary policy with region-specific inflation management measures.