Vector Autoregressive (VAR) Method in Analyzing the Effect of Inflation on Food Price Volatility (FPV) in Palopo City, Indonesia
Authors: Tenriawaru Andi Nixia , Tawaha Abdel Razzaq Al , Rukka Rusli , Ridwan Muhammad , Chan Nividita Varun , Syam Siti Hardiyanti 
Published: July 2023

Purpose: This study aimed to analyze the effect of Inflation on food prices in Palopo City, where the inflation rate is calculated based on index numbers collected from several commodities traded at each price level in the market, namely the Consumer Price Index (CPI).

Theoretical framework: The Vector Autoregressive (VAR) method is simultaneous equation modeling that has several endogenous variables simultaneously, but each endogenous variable is explained by lags of its own value and other endogenous variables in the model. Forecasting using the VAR method is in some cases better than complex simultaneous equations.

Design/methodology/approach: The stationarity test in this study uses the Augmented Dickey-Fuller (ADF) method, followed by determining lag optimal Akaike Information Criteria (AIC) and Schwarz information Criterion (SC) analysis. The stability test of the VAR model was carried out through the Johansen Cointegration Test at a 5% significance level which produced six equations with a trace statistically more significant than the critical value. Then an analysis of Impulse Response Functions (IRF) was carried out to see the dynamic response of the CPI variable to food commodity prices. The data used are time series for January 2018 to December 2020.

Findings: The inflation response to food price fluctuations in Palopo City resulted in three conditions. The Palopo City CPI responded positively to the price fluctuations of garlic and red chili. In contrast, shallots and chicken meat price fluctuations responded negatively to the Palopo City CPI. The Palopo City CPI did not permanently affect the price fluctuations of cayenne pepper and chicken eggs.

Research, Practical & Social implications: The practical implication of this research is that food commodity prices still have an influence on inflation movements. Local governments should cooperate with city governments in the production of food commodities by implementing cropping patterns on these commodities to overcome excess production, and it is necessary to carry out off-season production to achieve harvest deficits so that prices remain stable. Improvements to the trade system also need to be improved in addition to the production system. This is intended so that the distribution of food commodity products can be more efficient by implementing supply chain management.

Originality/value: Collecting time series data of the Consumer Price Index (CPI) for 6 commodities, namely shallots, garlic, chili peppers, cayenne pepper, broiler meat, and broiler eggs, in a modern model, namely a multivariate time series model with a high level of predictive accuracy of the model among these variables to predict and analyze the effects among these series and estimate the interactions among these series with the latest data is the value of this research, and then provide recommendations for the government in making economic strategies, especially for those related to inflation and food prices.