The Empirical Analysis of the Effects of Sudden GDP and Commodity Price Changes on Inflation Using Markov-Switching Model: Insights from Six Southeast Asian Countries

This study investigates the impact of abrupt changes in GDP growth and global commodity prices in six Southeast Asian countries: Indonesia, Malaysia, The Philippines, Singapore, Thailand, and Vietnam. Utilizing the Markov-switching model, we analyze the relationship between these variables and inflation, recognizing that each country has unique characteristics. The monthly data of each country is collected from January 2010 to May 2023, comprising 161 observations. Our findings reveal that global oil price fluctuations significantly influence inflation during higher inflation periods in most countries, while the impact diminishes during lower inflation periods, particularly in Singapore, Indonesia, and Vietnam. The effect of global wheat prices on inflation varies across countries, with a stronger impact observed in the higher inflation regime of the Philippines and the lower inflation regime of Indonesia. Global sugar prices play a substantial role in driving inflation dynamics in both higher and lower inflation periods in most countries, with exceptions in Thailand and the Philippines. Furthermore, GDP growth exhibits a significant positive relationship with inflation in both higher and lower regimes for most countries, with varying magnitudes of influence. Notably, negative GDP growth is associated with stagflation in the higher inflation regime. These insights have vital implications for policymakers, enabling tailored strategies to address specific challenges in each country. During high volatility periods, measures can mitigate inflationary effects from oil price shocks, while lower inflation periods require managing potential deflationary pressures from negative GDP shocks.