DO EXCHANGE RATES, INFLATION AND AGRICULTURAL CREDIT MATTER FOR FARMERS' TERMS OF TRADE? EMPIRICAL EVIDENCE OF ASYMMETRIC EFFECTS IN INDONESIA

Abstract

The role of farmers in the agricultural sector as food providers is very significant and is still relied upon as a livelihood. This study aims to analyze the determinants of farmers' terms of trade (FTOT) as a measure of welfare for farmers in Indonesia. The study applies the Nonlinear Autoregressive Distributed Lag (NARDL) model for monthly data from January 2010 to December 2023. The NARDL model is applied to capture the asymmetric effects of FTOT determinants. The results show that an increase in inflation decreases FTOT, while an increase in the food industry production index increases FTOT in the long run. Meanwhile, in the short run, rupiah depreciation, an increase in inflation and a decrease in credit decrease FTOT. Inflation is the most significant factor determining farmer welfare. Stabilizing inflation at controlled levels is key to maintaining the purchasing power of farming households. Sectoral linkages with the food industry as users of agricultural sector inputs also support farmer welfare. Monetary policy with a focus on inflation stabilization and agricultural development policies integrated with the industrial sector will greatly encourage farmer welfare