Interest Rate and Supply Response of Oil Palm Producers in Indonesia

Article history:
Received: 24 May 2021
Accepted: 12 July 2021

Available online: 30 September 2021

Page number: 1-21

Author: Zulfikar Bimajaya1 ; Tang Tuck Cheong1 and Mohammad Alias2

Supply response analysis of agricultural products remains feasiblein agricultural economics because of its relevance for producers andpolicymakers. This study estimates the extended Nerlovian model ofsupply response for the Indonesian oil palm producers, namely stateowned, private-owned, and smallholders. It mainly focuses on the impactof interest rate variation that reflects the cost of borrowing by producersfor replanting purpose. The data covers annual observations between1970 and 2017. The autoregressive distributed lag (ARDL) procedure andits non-linear form (NARDL) suggest a long-run relation of Indonesia’spalm oil supply response function, except for smallholders. In the longrun, a negative expected interest rate increases palm oil supply, especiallyfor the state-owned and private-owned producers. Oil palm producersare responsive to other supply response variables viz. relative prices,and government expenditure in the short-run. Similar findings observeif expected money supply replaces expected interest rate, to capturemonetary policy. Monetary policy by Bank Indonesia (Central Bank ofIndonesia) has an important implication to the palm oil sector.

1 Faculty of Business and Economics,
Universiti Malaya,
50603 Kuala Lumpur,

2 Faculty of Economics and Muamalat,
University Science Islam Malaysia
71800 Nilai,
Negeri Sembilan,