Nonlinear Phillips Curve Dynamics in Indonesia: A Bayesian Truncated Spline Approach

Ni Putu Ayu Mirah Mariati; I Wayan Sudiarsa; Ni Nyoman Ayu Suryandari

doi:10.31764/jtam.v10i4.39508

Nonlinear Phillips Curve Dynamics in Indonesia: A Bayesian Truncated Spline Approach

Ni Putu Ayu Mirah Mariati, I Wayan Sudiarsa, Ni Nyoman Ayu Suryandari

Abstract

The present study seeks to analyze the nonlinear relation between inflation and unemployment in Indonesia through the Bayesian Truncated Spline approach. The ordinary Phillips curves usually employ the linear assumption regarding the inflation-unemployment trade-off; nevertheless, the nonlinear and asymmetric nature of such a relation under various unemployment states can be detected empirically. As a result, the Bayesian Truncated Spline model is utilized as an attempt to determine the non-linear form of the Phillips curve with consideration of parameter uncertainty by means of posterior distributions. The annual data on inflation and unemployment rates of Indonesia from 2000 to 2025 were provided by Statistics Indonesia (BPS). The MCMC algorithm was applied to estimate model parameters, whereas LOOIC was used to assess model quality. From an empirical standpoint, there is a non-linear Phillips curve whereby the response of the inflation rate increases with decreasing levels of unemployment, and vice versa. In model selection, the Bayesian truncated spline model (LOOIC = 71.45) performs better than the linear model (LOOIC = 84.31). Hence, the non-linear model has higher predictive power and better performance. The findings show evidence of regime switching dynamics between the variables in the Indonesian economy, implying the need to account for non-linear effects in the study of macroeconomic relations. From a policy viewpoint, expansionary policies adopted in a period of low unemployment tend to create greater inflationary effects compared to similar policies carried out at high levels of unemployment.

Keywords

NonlinearPhillips Curve; Bayesian Estimation; Truncated Spline; Inflation; Unemployment.

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DOI: https://doi.org/10.31764/jtam.v10i4.39508