Constructing the Index of Indonesian Monthly Private Consumption Expenditure

Transcription

1 Working Paper in Economics and Development Studies Department of Economics Padjadjaran University No Constructing the Index of Indonesian Monthly Private Consumption Expenditure Achmad Kemal Hidayat Arief Bustaman Anhar Fauzan Eva Nurwita Adhitya Wardhana Arief Anshory Yusuf Department of Economics, Padjadjaran University June, 2011 Center for Economics and Development Studies, Department of Economics, Padjadjaran University Jalan Cimandiri no. 6, Bandung, Indonesia. Phone/Fax: For more titles on this series, visit:

2 Constructing the Index of Indonesian Monthly Private Consumption Expenditure * Achmad Kemal Hidayat, Arief Bustaman, Anhar Fauzan, Eva Nurwita, Adhitya Wardhana and Arief Anshory Yusuf Center for Economics and Development Studies (CEDS) Department of Economics, Padjadjaran University Abstract Private consumption expenditure (PCE) contributes a major share in Indonesian GDP and its growth has been dominating the economic growth. PCE is also linked directly to the welfare of Indonesian people making it even more relevant for its close monitoring. However, despite the high volatility of macroeconomic conditions due to both global and domestic disturbances, indicators that measure PCE in frequency higher than quarterly is not yet existent in Indonesia. This paper is the first attempt to construct a monthly index of private consumption expenditure for Indonesia. Using a methodology based on the experience of other countries and constrained with data availability, we devise the index based on four statistically relevant variables: value added tax revenue, excise tax revenue, electricity consumption, and fuel consumption. Using the weights estimated based on the principal component analysis we found that our monthly PCE index fits well and correlate highly with the quarterly private consumption expenditure from the national accounts data. We hope that our initial attempt to construct the monthly PCE index will encourage others to devise even better measure of monthly consumption indicators. Keywords: Private consumption expenditure, Macroeconomic Policies, Indonesia JEL Classification: E2, E21, C43 * This paper is a finding of a research funded under the collaboration between Center for Economics and Development Studies (CEDS), Padjadjaran University and the Fiscal Policy Office of the Ministry of Finance, Republic of Indonesia. The view expressed in this paper is our personal view and not the institutions we are affiliated with or the organization that we collaborate with. Corresponding authors: achmad.hidayat@fe.unpad.ac.id We would like to thank Victor Firmana, M. Purnagunawan, and Arief Ramayandi for the assistance in data collection as well as for their helpful comments and discussants. Errors are solely responsibility of the authors. 1

3 1. Introduction The fluctuation of global economic condition is, more often than not, exogenous to domestic macroeconomic management. Coupled with un- anticipated domestic- sourced fluctuation, the best that macroeconomic managers can do is improving expectation and anticipation. Fluctuation of various macroeconomic indicators, dangerous enough to destabilize our macroeconomic planning is so volatile in the duration that current data system can monitor. Most of these indicators, such as Gross Domestic Product (GDP) data are available no more than in quarterly and/or annually. There are some higher frequency data available, such as monthly production index, yet a monthly indicator that directly measuring the aggregate demand especially private consumption expenditure is not yet available. The importance of monthly pattern of aggregate consumption expenditure is obvious. Not only that it has the highest contribution to the aggregate final demand, but how it also relates directly to the personal income fluctuation. From this, we can have a useful picture of the linkage between macroeconomic short- run fluctuation with income and welfare. Furthermore, consumption has been giving the highest contribution among other variables to the Indonesia s GDP growth over last few decades. This consumption index along with other existing monthly macroeconomic indicators, such as inflation rate and production index can be a reference of making macroeconomic policy in various government agencies, in particular, the Ministry of Finance. The objective of this paper is to propose a method of constructing the Index of monthly private consumption expenditure for Indonesia and apply them using the existing available data. This paper is organized as follow. Section 1 introduce the background of the paper, section 2 presents Brief Literature Review, Section 3 presents the profile of data uses, Section 4 presents the methodology of constructing weights and index, Section 5 is the result and Section 6 presents the concluding remarks. 2. Brief Literature Review We found that not many countries measure regularly monthly consumption index. What we found, is that at least three countries have done such measurement: Thailand, Japan, and Switzerland 1.. In particular, that other countries consumption indexes are Thailand s Consumption Index issued by Bank of Thailand, Japan Synthetic Consumption Index, and Switzerland s Consumption Index, issued by UBS (Universal Bank of Switzerland). We will use the Thailand index as the main reference due to is its similarity with Indonesia in macro economy characteristic (consumption culture), geographical proximity, and level of development. From Bank of Thailand Working Paper titled The Revision of Private 1 We will use the methodology used by these three countries as a reference point for calculating Indonesian monthly consumption index. 2

4 Consumption Index (2007) published under Macroeconomic Department of Bank of Thailand, composite consumption index constructed in Thailand consists of 5 major components. Those 5 components are: a. Value Added Tax (VAT) at constant price. b. Consumption of Imported Goods at constant price. c. Household s electricity usage. d. Fuel Index. e. Car Index. The detail of each component can be seen from Table 1 below. Table 1. Thailand Private Consumption Index April 2010 August 2010 APR 2010 MAY 2010 JUN 2010 JUL 2010 AUG Private Consumption Index Car Index (2000 = 100) Passenger Car Sales (Unit) 28, , , , , Motorcycle Sales (Unit) 143, , , , , Commercial Car Sales (Unit) 29, , , , , Fuel Index (2000 = 100) Sales of Benzene&Gasohol (Million of litre) 8 Sales of Diesel (Million of litre) 1, , , , , Sales of LPG (Millon of litre) Sales of NGV (Million kilograms) Household Electricity Usage 2, , , , ,640.2 (Million kilowatt/hour) 12 Real Imports of Consumer Goods at , , , , Prices (Million US$) 13 Real VAT at 2000 Prices (Million baht) 36, , , , ,602.6 Source: The second reference is Japan consumption index or also called Synthetic Consumption Index, cited from Economic Monthly Review published by Bank of Tokyo (2007). This consumption index uses a comprehensive method of measurement, utilizing demand and supply side of the economy. We can see that tertiary expenditures such as health and housing are included in demand side approach. Figure 1 below illustrates the fluctuation of the Japan consumption index. 3

5 Figure 1. Japan Synthetic Consumption Index (2000=100) Source: The Last reference is Switzerland Consumption Index. UBS issued this index for the purpose of giving information of consumption s trend in Switzerland. This composite consumption index consists of 5 components below: a. New vehicle registration. b. Retail sector activities. c. Domestic hotel occupancy rate. d. Consumer s Sentiment Index. e. Transactions by credit cards. Figure 2 below illustrate the fluctuation of the Switzerland consumption index which is also compared with the real data of aggregate consumption expenditure. 4

6 Figure 2. Consumption Index of Switzerland Source: 3. Data Data is important element of our search for the best method to calculate Indonesian monthly personal consumption expenditure index. Data availability indeed primarily dictates the methodology that we use. We consider the following available data can indicate the fluctuations of personal consumption expenditure in Indonesia. a. Consumption of imported goods at constant price. b. Household electrical usage. c. Fuel consumption. d. Car consumption. e. Value Added Tax (VAT) at constant price. f. Consumption credit. g. Excise Tax h. Motorcycle consumption. Most of the above data were collected from Badan Kebijakan Fiskal (BKF) Indonesian Ministry of Finance, for monthly frequency with time horizon between January 2007 and June Some other data such as fuel consumption were collected from Indonesian Statistical Bureau and Directorate General of Oil and Gas. 5

7 4. Methodology We use several steps in the construction of Indonesia s Monthly Personal Consumption Expenditure Index. First, after making all variable in constant price, we setup a database consisting all of candidate variables (8 variables listed previously). It was then followed by selecting variable(s) of which its growth is positively related to the growth of consumption expenditure in GDP to make sure the same direction of movement between them. In this case, we employed the spearman correlation measurement. After correlation measurement is done, following Handbook on Constructing Composite Index by OECD (2008) of construct composite index, the selected variables will be the inputs into the Principal Component Analysis (PCA) to calculate each of their weights. Therefore, the resulting consumption index is categorized as a weighted index that can be measured by this following formula (Ronnald and Thomas : 1984):!!! =!!!!!! (1) where : I t = Consumption Index in time t W i = Weight for a particular variable i = Partial Index of Consumption s Component I it And for the Partial Index is given by this equation:!!" =!!!! 100 (2) where : P t : Value of Consumption Component in time t P 0 : Value of Consumption Component in base period 5. Result The result of Spearman correlation measurement suggests that only 4 variables having positive correlation with consumption expenditure in GDP. Those variables are Value Added Tax (VAT) revenue at constant price, Household electrical usage, Excise Tax revenue, and Fuel consumption. Value Added Tax revenue has the highest correlation with consumption expenditure. The result of correlation measurement is illustrated in Figure 3 below: 6

8 Figure 3. Correlation Measurement Result Motorcycle Import Car Cons.Credit Fuel Tax Electric VAT Source: Authors calculation The next step is measuring partial index. The trend of the partial index itself can be seen from Figure 4 below. Figure 4. Partial Index of VAT, Electrical Usage, Excise Tax, and Fuel Consumption VAT Fuel Electricity Excise Par]al Index Source: Authors calculation As can seen from Figure 4, except for VAT, all the three other components (fuel, electricity and excise tax) follow similar long- run trend. Electricity index is less fluctuated compared to 7

9 the other three components. Short run monthly fluctuation, however, is relatively similar except in its magnitude. Most notable similarity is the fluctuation of electricity and fuel index. Figure 5. Monthly Indonesian Consumption Index Source: Authors calculation The final consumption index is shown in Figure 5. With January 2007 as base month, the index shows positive trend from January 2007 to June Some fluctuations occur every year around end of year to March. There are sharp decline in March and April Figure 6 below compare our constructed monthly personal consumption index, aggregated into quarterly index with the personal consumption expenditure of the gross domestic product. Compared to Personal Consumption Expenditure components on Indonesia GDP, our consumption index has strong similarity proven by correlation about 94.14% and Coefficient of variation about 5.8% 8

10 Figure 6. Quarterly- aggregated Monthly PCE Index and GDP- Based PCE Consumplon Index Personal Cons. Expend Source: Authors calculation and CEIC Database 6. Concluding remarks Using Thailand Monthly Consumption Index as a reference, this study conducts the measurement of Indonesia Monthly Personal Consumption Index. The components of the index itself decided based on positive correlation computation and we have 4 components as a result; Excise Tax, Electricity, Fuel and Value Added Tax. The calculation of the weight of the each component of the index uses the PCA (Principal Component Analysis). The result shows that Indonesia Consumption Index from January 2007 to June 2010 has positive trends with downward trend around every end of the year to the March of the following year. In general, our constructed index correlates strongly with the quarterly personal consumption index calculated by Indonesian Statistics Office (BPS). Data availability may be the greatest weakness of the index construction attempted in this paper. However, it is hoped that this exercise will encourage other researchers and government institution to devise a better monthly consumption expenditure index that we think is quite important in assisting the macroeconomic management in Indonesia. 9

11 References Badan Kebijakan Fiskal Kementerian Keuangan RI, Badan Pusat Statistika, Direktorat Jenderal Migas, Economic Research Office, Economic Monthly Review, The Bank of Tokyo- Mitsubishi- UFJ, Ltd, Handbook on Constructing Composite Index, Publication of OECD, ( Macroeconomic Team Bank Of Thailand, Working Paper: The Revision of Private Consumption Index, The Bank of Thailand, ( Wonnacott, Ronald and Wonacott Thomas H; Introductory Statistics, Fourth Edition, London, Ontario, Canada, 1984 (W) 10