An Analysis of Monetary Policy and Geopolitical Instability in Controlling Inflation in Indonesia.
Rosenta Febri Mutiara Sinaga

Faculty of Economics, Medan State University, Jalan Willem Iskandar Pasar V Medan Estate, Indonesia, rosentaf[at]gmail.com

Abstract

This study aims to analyze the effects of money supply, interest rate, exchange rate, Gross Domestic Product (GDP), and geopolitical instability on inflation in Indonesia. The analysis employs a multiple linear regression model combined with the to capture both short-term and long-term relationships between variables. The data used spans from 1990 to 2023 and is obtained from secondary sources such as Bank Indonesia, the Central Bureau of Statistics (BPS), and Macromicro Data.
The findings reveal that in the short run, only the interest rate and exchange rate have a statistically significant impact on inflation. In the long run, interest rate, money supply, and GDP are found to significantly influence inflation. The error correction term (ECT(-1)) is negative and significant at -1.09, indicating a very rapid adjustment-referred to as ^over-adjustment^-towards equilibrium in response to inflationary imbalances within one period. These results highlight the effectiveness of the ECM-EG method in designing economic policies based on time series data, allowing for evidence-based policymaking while minimizing the risk of planning and implementation errors.

Keywords: Inflation, Monetary Policy, Money Supply, Interest Rate, Exchange Rate, Gross Domestic Product, Geopolitical Instability

Topic: Economics, Social and Early childhood Education