DETERMINANTS OF MACROECONOMIC FACTORS ON INDONESIA'S ECONOMIC GROWTH WITHIN THE INFLATION TARGETING FRAMEWORK
DOI:
https://doi.org/10.5281/zenodo.21756058Keywords:
inflation targeting framework, economic growth, interest rate, inflation, monetary policyAbstract
Indonesia officially adopted the Inflation Targeting Framework (ITF) in 2005. However, economic growth during the 2008–2024 period experienced significant fluctuations due to both external and domestic shocks, raising empirical questions regarding the effectiveness of the monetary policy transmission mechanism. This study aims to analyze the short-run and long-run effects of inflation, the Bank Indonesia policy interest rate, the rupiah exchange rate, and investment on Indonesia's economic growth over the 2008–2024 period. The study employs a quantitative explanatory approach using quarterly time-series data obtained from Bank Indonesia and Statistics Indonesia (BPS). Data were analyzed using the Error Correction Model (ECM), preceded by stationarity, cointegration, and classical assumption tests. The findings indicate that, in the short run, only investment has a positive and statistically significant effect on economic growth (coefficient = 24.0738; p = 0.001). Inflation, the policy interest rate, and the exchange rate are found to be statistically insignificant, suggesting that these variables require a longer transmission lag to influence economic growth. In the long run, the significant Error Correction Term (ECT) (coefficient = −1.331) confirms the existence of a stable equilibrium relationship between all macroeconomic variables and economic growth, while also demonstrating a strong self-correcting mechanism. The study concludes that the Inflation Targeting Framework has been effective as a nominal anchor for maintaining long-term macroeconomic stability, although the short-run impact of its policy instruments remains limited. These findings imply that strengthening the policy mix between monetary and fiscal policies is essential, as interest rate adjustments alone are insufficient to stimulate economic growth. The government should prioritize accelerating investment through regulatory simplification, legal certainty, and investment incentives. Furthermore, maintaining transparent and consistent policy communication is crucial for anchoring market expectations and ensuring the optimal functioning of the economic adjustment mechanism.
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