ISSN: 2407-814X (p); 2527-9238 (e) AGRARIS: Journal of Agribusiness and Rural Development Research Vol. 8 No. 1 January – June 2022, Pages: 34-45 Article history: Submitted : April 20st, 2021 Revised : November 23rd, 2021 Accepted : March 22nd, 2022 Bayu Krisnamurthi and Anisa Dwi Utami* Department of Agribusiness, Faculty of Economic and Management, IPB University, Indonesia *) Correspondence email: anisadwiutami@apps.ipb.ac.id The Effect of Price Policy on Price Dynamics: Empirical Evidence in Indonesian Rice Market at Wholesale Level DOI: https://doi.org/10.18196/agraris.v8i1.11546 ABSTRACT As a major share expenditure for the poor, rice is attributed as a strategic food commodity in the Indonesian economy. For many decades, the Indonesian rice market has been intervened by the price regulation. The Indonesian government had set two types of rice price policies of 2016 and 2017 with the argument of price stabilization during the last five years. This study aimed to investigate the effect of price policies of 2016 and 2017 on the domestic price dynamics in the Indonesian rice market. This study used daily price series taken from the Cipinang Wholesale Rice Market in Jakarta within the period of October 1st, 2014, until February 12th, 2018 covering 10 rice varieties. The role of price policy on the price dynamics was evaluated by using a multivariate error correction model (MVECM). The empirical findings confirmed that generally, these price policies had different effects on the price dynamics which proposed different reactions from the different rice varieties both in magnitude and signs. The variations were also found regarding the short-run and long-run behavior. Generally, the findings suggested a relatively small elasticity of the policy on the prices. Keywords: Indonesia; price dynamics; price policy; rice; VECM INTRODUCTION Market, politics, and price dynamics have been interesting subjects of discussions in the existing economic literature (Anderson, 2012; Gilbert, 2012; Pieters & Swinnen, 2016; Timmer, 2017). The debates simultaneously arrive at questions related to the effectiveness and efficiency of the government interventions in regulating the domestic markets. In economic development and poverty reduction strategies, particularly for developing countries, market interventions are generally implemented for pursuing stability of prices and managing the allocation of resources within the economy (Barrett, 2013; Naylor, 2014; Pinstrup- Andersen, 2014). In the food sector, price instability has been attracting a lot of attention since it indicates what is happening in food security (Berger, Dalheimer, & Brümmer, 2021; Dalheimer, Herwartz, & Lange, 2021; Gardebroek, Hernandez, & Robles, 2016; Herwartz & Saucedo, 2020; Honfoga, N’tandou-Bonzitou, Vodouhè, Bellon, & Hounhouigan, 2018; Timmer, 2017). http://issn.pdii.lipi.go.id/issn.cgi?daftar&1420518152&1&& mailto:anisadwiutami@apps.ipb.ac.id https://doi.org/10.18196/agraris.v8i1. ISSN: 2407-814X (p); 2527-9238 (e) 35 The Effect of Price Policy on Price Dynamics: ….. (Krisnamurthi and Utami) Utami) The price dynamics reflect a commodity availability in a competitive market which matched by the consumers' willingness to substitute the commodity for another in their expenditure bundle. In this setting, high prices imply scarcity which will drive the producer to expand the production, while the consumers are likely to expand their consumption. Along with the debates in the existing literature, intervention in the price, such as setting the price reference, may lead to market destruction where the role of the market as price discovery would be dampened. Moreover, as markets have the economic function of guiding the cost of transportation, storage, and processing of food products which reflect the willingness of sellers to transfer to the consumers, this price policy will also influence the behavior of actors along the supply chain in the food industry. Consequently, the competitiveness of the industry would also be affected. Rice is attributed as a strategic commodity in most Asian economies and the main staple food of nearly half of the world population (Maclean, Dawe, Hardy, & Hettel, 2013). Being the fourth world’s most populous country, Indonesia plays an important role in the world’s rice economy, particularly in food security and development. The rice industry plays a critical role in affecting people’s welfare and the national economic growth of the Indonesian economy. In several rice-producing countries, rice generally accounts for half of the farmers’ income, although with declining trends of its share due to its changing nonfarm rural economies. Meanwhile, on the consumer side, rice accounts for 25-40% of households’ expenditures. Thus, changes in rice prices will likely lead to large changes in purchasing power and nutrition of the poor (Dawe & Timmer, 2012). In addition, Grabowski & Self (2016) found that rice price stability was one of the main drivers of structural change in Indonesia. The shifting of labor from agricultural to manufacturing is critically dependent on the existence of food price stability. Meanwhile, Warr and Yusuf (2013) found that during the world food price spikes in 2007-2008, poverty in Indonesia had increased, particularly among the rural people. The higher agricultural prices can also result in higher income for the rural people since poor farmers in rural areas are the net food buyers. Besides discussions on the role of the rice industry in the Indonesian economy, some studies have emphasized the relation of the Indonesian rice industry with the world market. In response to the increasing population, the current situation has shown that import has also played a role in fulfilling the domestic rice consumption. By assuming slow yield growth, steady consumption, and contracting cultivated area in the Indonesian rice industry, Bourgeois and Kusumaningrum (2008) have predicted that Indonesia will likely become a net importer for several food products including rice in 2020. Dawe (2008) in his paper critically asks whether Indonesia can trust the world market. His question is then related to whether the world market prices truly reflect the opportunity cost of producing rice given the trade- distorting subsidies and import restrictions in other countries. As the existing literature shows, the world rice market is characterized by an unstable and unreliable supply. Ceballos, Hernandez, Minot, and Robles (2017) emphasized this finding that the world rice prices are quite volatile in many developing countries so that the rice market appears to be more sensitive to volatility in the international markets. Meanwhile, Hoang and Meyers (2015), using a http://issn.pdii.lipi.go.id/issn.cgi?daftar&1420518152&1&& ISSN: 2407-814X (p); 2527-9238 (e) 36 AGRARIS: Journal of Agribusiness and Rural Development Research partial equilibrium framework, predicted that the realization of free trade liberalization in 2020 would likely induce declining domestic prices in the Indonesian rice market. Indonesian rice market has been politically intervened for decades mainly by the price regulation on the domestic markets besides intervention on the domestic supply related to import and export regulations. Therefore, rice price stabilization is one of the most popular issues in every political agenda in Indonesia. Along with the importance of policy discussions in the literature, some studies have emphasized the role of Indonesian government’s interventions in the rice industry (Simatupang & Timmer, 2008). There are at least two points arising in the policy debates in Indonesian rice economic literature which focus on the goal of self-sufficiency and price stabilization. First, the self-sufficiency policy seems to be high cost in terms of government budget and thus could lead to inefficiency, and second, the policies are likely to result in market distortion (Timmer, 2017). In addition, Nuryanti, Hakim, Siregar, and Sawit (2017) argued that rice policies in Indonesia are biased to the government where the highest political preference of the government is received by the government itself. Meanwhile, Dorosh (2008), based on his studies on the food price stabilization policies in some developing countries, proposed the importance of more relying on market mechanisms to trigger the efficiency of the policy implementation. The Indonesian government set two types of rice price policy in 2016 with the argument for maintaining price stabilization during the last five years and revised it in 2017. This study aimed to investigate the effect of price policies in 2016 and 2017 on the domestic price dynamic in the Indonesian rice market. Specifically, this study attempts to analyze the effect of the price policy through a detailed investigation on different rice varieties which can represent quality differences and find out the existence of different reactions from the different rice varieties. An understanding of the impact of price dynamics for different groups of consumers and producers can help to identify the unanticipated consequences of the policy. RESEARCH METHOD This study employed the time series econometric model, namely the multivariate error correction model (VECM). This study used daily price series taken from the Cipinang Wholesale Rice Market in Jakarta within the period of October 1st, 2014, until February 12th, 2018 (n = 1225 observations). The Cipinang Wholesale Market (PIC) is the main wholesale rice market in Jakarta which transfers most of the rice from several producing areas in Java as well as supplies rice to several regions outside Java Island. This study covered 10 rice varieties based on the type and quality presented in Table 1. All price series were transformed into logarithmic form. Figure 1 presents the dynamics of rice prices being investigated. The multivariate vector error correction model (VECM) was employed to investigate the dynamics of rice prices. A VECM can give information about the reactions among investigated prices both in the long run and short-run periods. First, it was presumably asked whether the investigated rice prices in PIC share the same long-run information. According to this assumption, a test for the existence of one common cointegrating factor was conducted. http://issn.pdii.lipi.go.id/issn.cgi?daftar&1420518152&1&& ISSN: 2407-814X (p); 2527-9238 (e) 37 The Effect of Price Policy on Price Dynamics: ….. (Krisnamurthi and Utami) Utami) Suppose n x 1 vector of nonstationary price series i.e. I(1) Pt = P1, P2,…, Pnt at time t for the i rice variety. This Pt can be written as: Pt = Anxsft + ~Pt (1) TABLE 1. DESCRIPTION OF INVESTIGATED RICE PRICES IN IDR Rice Varieties Quality Mean Minimum Maximum Cianjur Kepala (CK) Premium 13,366 12,000 15,600 Cisadane (CS) Premium 12,171 11,000 14,925 Setra (SE) Premium 12,219 10,900 13,825 Saigon (SA) Premium 11,117 9,900 13,200 Murni 1 (M1) Medium 10,465 9,000 13,675 Murni 2 (M2) Medium 9,656.8 8,200 12,400 Murni 3 (M3) Medium 8,938.3 7,500 11,825 IR 641 Low 9,990.3 8,800 12,650 IR 642 Low 9,091.8 8,100 12,075 IR 42 Medium 10,486 9,000 12,600 FIGURE 1. DAILY RICE PRICES IN PASAR INDUK CIPINANG FROM OCTOBER 2014-FEBRUARY 2018 (IDR/KILOGRAM) Where Pt was an s x 1 vector of s (s