Asymmetric Price Transmission in Indonesia’s Wheat Flour Market

Publication | March 2014

This paper tests for asymmetric price transmission from international wheat to domestic wheat flour markets in Indonesia using an error correction model. They conclude asymmetric transmission exists and occurs due to market concentration of wheat flour milling.

Data indicate that its domestic price in Indonesia has been increasing regardless of movements in the international price of wheat. A test for asymmetric price transmission from international wheat to domestic wheat flour markets is conducted using an error correction model and finds the presence of asymmetric price transmission. The upward adjustment in the domestic price of wheat flour is much faster than its adjustment downward when it deviates from long-run equilibrium. Results are robust to use of disaggregated data as well as to inclusion of additional of control variables such as prices of other inputs.

This paper argues that asymmetric transmission occurs due to market concentration of wheat flour milling. It offers some policy suggestions for correcting these.

Contents 

  • Abstract
  • Introduction
  • Some Stylized Facts about the Wheat Flour Market in Indonesia
  • Conceptual Framework
  • Data and Empirical Strategy
  • Empirical Results
  • Sources of Market Power
  • Summary and Policy Implications
  • References