Determinants of Inflation Rate in Indonesia

Abstract

This study aims to analyze the influence of some independent variables which are believed to have an impact on inflation in Indonesia. Also, as one of the variables that are observed by the Central Bank of Indonesia as a variable that could influence inflation stability in Indonesia based on its volatility. Those independent variables are divided in four categories namely money supply, exchange rate, BI rate as the interest rate, and gross domestic product. The data were obtained from the Indonesian Economic and Financial Statistics (SEKI) of Central Bank of Indonesia and Statistics Indonesia from 2010 to 2017. This study used an Error Correction Model (ECM) to get the equilibrium model and find out the influence of every independent variable on the short-run and long-run. Results show that the money supply has a positive and significant influence towards inflation in the short-run when money supply increased by one point, then inflation increased by 9.68 points. Nevertheless, the money supply has insignificant influence in the long-run equilibrium. The exchange rate and BI rate also have an insignificant effect on inflation neither in the long-run nor short-run. The gross domestic product has an insignificant effect on inflation both in long-run and short-run equilibrium. In a nutshell, this research summarizes the findings that have been conducted and offers some recommendations that could be taken into consideration to improve and strengthen the model's estimation to be more relevant for the future implementation.

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