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Undergraduate Economic Review

Abstract

This paper empirically examines the impact of oil price levels and volatility on key macroeconomic indicators of Indonesia. In particular, two measures of volatility – historical volatility and realized volatility – are utilized and compared for their different macroeconomic impacts. The relationships between oil price levels, the two volatility measurements, and macroeconomic indicators are explored with the Granger-causality test and the vector autoregressive system (VAR). Empirical analysis is done on two sets of data – one over the period between 1990 and 2008 and another between 1999 and 2008, following a structural break in the time series data during the Asian Financial Crisis in 1997-1998 (Rafiq, Salim and Bloch ,2008). Results from both sets of data show that realized volatility is a significant predictor of growth rates of GDP only when oil price levels is included in the VAR system. Another important result is that oil price levels has statistically meaningful impacts on government consumption and investment, and that the explanatory power of price levels to investment is strengthened when realized volatility is included in the time-series analysis.

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