VECM Method as a Prediction Tool for Inflation in Mataram City Based on Exchange Rate Fluctuations

Yohana Hesta, Syaharuddin Syaharuddin, Vera Mandailina

Abstract


Abstract: This research is important because inflation is an economic indicator that greatly affects people's purchasing power and the economic stability of a region. Therefore, the purpose of this study is to forecast the inflation of Mataram City for the next five years by considering the influence of fluctuations in the exchange rate of the rupiah against the United States dollar (IDR/USD) using the Vector Error Correction Model (VECM) method. This research is a forecasting experiment that uses annual data on inflation and exchange rates for the period 2014-2023, obtained from the Central Statistics Agency (BPS). The results show that the VECM model is able to capture the long-term relationship between inflation and exchange rates, with inflation predictions for 2024 to 2028 showing a fluctuating pattern, including deflation in 2024 and inflation spikes in 2026 and 2027. The accuracy evaluation shows that the Mean Absolute Percentage Error (MAPE) value for inflation prediction reaches 45.10%, while the exchange rate prediction is more accurate with a MAPE of 1.25%. The implication of the results shows that although the model is quite reliable in predicting the exchange rate, the accuracy of inflation prediction still needs to be improved. Therefore, this result can be an important input for economic policy planners in anticipating future price dynamics and considering other model combinations to improve the accuracy of inflation forecasting.

Keywords


Inflation, Exchange Rate, VECM, Prediction, MAPE, Mataram City, Economic Forecasting

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References


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