The Impact of Selected Macroeconomic Variables on Inflation Rates in Indonesia Under the Inflation Targeting Framework Policy
Moh Adenan, Lilis Yuliati, Mirza Irfania, Thomas SosecoAbstract
Research background
The implementation of the Inflation Targeting Framework (ITF) in Indonesia in 2005 raises important questions about the extent to what extent the impact of the ITF can influence macroeconomic indicators, for instance, interest rates, exchange rates, and GDP growth, on inflation rates in Indonesia in the short term and long term.
Purpose
This research investigates the influence of interest rates, exchange rates, and GDP growth on the inflation rate in Indonesia under the ITF policy.
Research methodology
This research uses time series data from 2005 Q3 to 2023 Q3 and is analysed using the Error Correction Model (ECM).
Results
Our findings show a positive and significant effect of interest rates on inflation in the short term, but a positive and non-significant effect in the long term. Next, the exchange rate positively and significantly influences inflation in Indonesia in the long term, but it positively influences inflation in the short term. Lastly, in the short term, GDP growth positively affects inflation in Indonesia, while in the long term, GDP growth negatively and significantly affects inflation.
Novelty
This research examines the effects of macroeconomic variables on inflation in Indonesia in the period after the implementation of the Inflation Targeting Framework policy.