An assessment of Indonesia’s monetary integration with oil exporter countries in Islamic nations: evidence from panel data

The paper aims to assess the monetary integration between Indonesia and oil exporting countries in Islamic countries. Increasing the oil trade intensity between Indonesia and oil-producing countries can drive monetary integration among them. This study applies the Optimum Currency Area (OCA) index to measure the degree of monetary integration between Indonesia and 21 oil-producing countries in the OIC. The results exhibit that the majority of oil-producing countries are strongly integrated with Indonesia. The panel regression test highlights two variables – the inflation similarity and trade openness – which had a significant effect on the OCA. This study provides an important policy base for Indonesia, primarily in improving its relations with oil-producing countries. Two channels – trade openness and maintaining harmonious price stability – are the entry point for Indonesia to integrate with oil countries.