Empirical analysis of the impact of monetary policy through interest rates on economic growth in Indonesia

Muh. Qardawi  Hamzah; Andi  Ruslan; Ihsan  Ashari

doi:10.55942/pssj.v6i2.851

Authors

Muh. Qardawi Hamzah Faculty of Economics and Business, Makassar State University
Andi Ruslan Faculty of Economics and Business, Makassar State University
Ihsan Ashari aculty of Economics and Business, Siliwangi University

DOI:

https://doi.org/10.55942/pssj.v6i2.851

Keywords:

Monetary policy, policy interest rate (BI Rate), inflation, economic growth, Gross Domestic Product (GDP)

Abstract

This study investigates how inflation and monetary policy, as reflected in the policy interest rate (BI Rate), affect Indonesia's economic growth, as indicated by the GDP. Multiple linear regression analysis was employed to discover connections between independent and dependent variables in an economic setting. The analysis's findings indicate that neither the BI Rate nor inflation significantly affects GDP growth. Although not sufficiently strong to be regarded as statistically significant, the positive coefficients derived from both variables show a propensity for increases in inflation and policy interest rates to enhance economic growth. The significance of the interaction between the two variables in monetary policy is confirmed by simultaneous analysis, which reveals that both inflation and the BI Rate significantly contribute to GDP variance when examined together. These results suggest that monetary policy must work in tandem with fiscal policy and the real sector, as well as be adaptively managed to respond to changes in the global economy to effectively stimulate economic growth in Indonesia [2]. This study is anticipated to significantly aid policymakers in developing more potent plans to accomplish sustainable growth and national economic stability.

Author Biographies

Muh. Qardawi Hamzah, Faculty of Economics and Business, Makassar State University

Muh. Qardawi Hamzah is currently serving as a Regional Economic Planner with a focus on developing strategic policies to enhance regional economic growth. He is affiliated with a leading economic research institution and possesses expertise in econometrics, data analysis, and sustainable development.

Andi Ruslan , Faculty of Economics and Business, Makassar State University

Andi Ruslan is affiliated with Faculty of Economics and Business, Makassar State University

Ihsan Ashari, aculty of Economics and Business, Siliwangi University

Ihsan Ashari is affiliated with Faculty of Economics and Business, Siliwangi University

References

Altavilla, C., Canova, F., & Ciccarelli, M. (2020). Mending the broken link: Heterogeneous bank lending rates and monetary policy pass-through. Journal of Monetary Economics, 110, 81–98. https://doi.org/10.1016/j.jmoneco.2019.01.001

Anas, T., Hill, H., Narjoko, D., & Putra, C. T. (2022). The Indonesian Economy in Turbulent Times. Bulletin of Indonesian Economic Studies, 58(3), 241–271. https://doi.org/10.1080/00074918.2022.2133344

Anwar, C. J., Suhendra, I., Purwanda, E., Salim, A., Rakhmawati, N. A., & Jie, F. (2023). Investigating the relationship between monetary policy, macro-prudential policy and credit risk in Indonesia banking industry. Heliyon, 9(7), e18229. https://doi.org/10.1016/j.heliyon.2023.e18229

Bianchi, F., & Melosi, L. (2019). The dire effects of the lack of monetary and fiscal coordination. Journal of Monetary Economics, 104, 1–22. https://doi.org/10.1016/j.jmoneco.2018.09.001

Bräuning, F., & Ivashina, V. (2020). U.S. monetary policy and emerging market credit cycles. Journal of Monetary Economics, 112(xxxx), 57–76. https://doi.org/10.1016/j.jmoneco.2019.02.005

Caballero, R. J., & Simsek, A. (2024). Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect. Journal of Finance, 79(3), 1719–1753. https://doi.org/10.1111/jofi.13343

Caporale, G. M., Menla Ali, F., Spagnolo, F., & Spagnolo, N. (2017). International portfolio flows and exchange rate volatility in emerging Asian markets. Journal of International Money and Finance, 76, 1–15. https://doi.org/10.1016/j.jimonfin.2017.03.002

Carl, W. E. (2021). Monetary theory and policy (Second). MIT Press.

Chukwuemeka, O. A. (2024). A Theoretical and Empirical Literature on Economic Growth. 5(02), 07–16. https://doi.org/10.52919/arebus.v5i02.60

Davis, J. S., & Zlate, A. (2023). The global financial cycle and capital flows during the COVID-19 pandemic. European Economic Review, 156(October 2022), 104477. https://doi.org/10.1016/j.euroecorev.2023.104477

Davoodi, H. (2021). Macroeconomic Stability and Inclusive Growth. IMF Working Papers, 2021(081), 1. https://doi.org/10.5089/9781513574363.001

Georgiadis, G. (2016). Determinants of global spillovers from US monetary policy. Journal of International Money and Finance, 67, 41–61. https://doi.org/10.1016/j.jimonfin.2015.06.010

Handayani, F. A., & Kacaribu, F. (2021). Asymmetric transmission of monetary policy to interest rates: Empirical evidence from Indonesia. Buletin Ekonomi Moneter Dan Perbankan/Monetary and Banking Economics Bulletin, 24(1), 119–150. https://doi.org/10.21098/bemp.v24i1.1201

Hubert, P., & Labondance, F. (2021). The signaling effects of central bank tone. European Economic Review, 133. https://doi.org/10.1016/j.euroecorev.2021.103684

Indrawati, S. M., Satriawan, E., & Abdurohman. (2024). Indonesia’s Fiscal Policy in the Aftermath of the Pandemic. Bulletin of Indonesian Economic Studies, 60(1), 1–33. https://doi.org/10.1080/00074918.2024.2335967

Ippolito, F., Ozdagli, A. K., & Perez-Orive, A. (2018). The transmission of monetary policy through bank lending: The floating rate channel. Journal of Monetary Economics, 95, 49–71. https://doi.org/10.1016/j.jmoneco.2018.02.001

Jarociński, M., & Karadi, P. (2020). Deconstructing monetary policy surprises-The role of information shocks. American Economic Journal: Macroeconomics, 12(2), 1–43. https://doi.org/10.1257/mac.20180090

Kallianiotis, I. N. (2024). Money Supply, Reaction Functions, Financial Markets and Macroeconomic Conditions. Global Academic Journal of Economics and Business. https://doi.org/10.36348/gajeb.2024.v06i03.001

Mankiw, N. G. (2021). Principles Of Economics, Ninth Edition. In Cengage.

Mahardini, D. F., Kasenda, I., Afgani, M. W., & Isnaini, M. (2024). Quantitative Research Philosophy in Research Methodology. JUPE: Jurnal Pendidikan Mandala, 9(4), 1135. https://doi.org/10.58258/jupe.v9i4.7830

Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (Twelfth).

Nakamura, E., & Steinsson, J. (2018). High-frequency identification of monetary non-neutrality: The information effect. Quarterly Journal of Economics, 133(3), 1283–1330. https://doi.org/10.1093/QJE/QJY004

Purnamasari, D. I., Ali, H. M., & Mahpop, A. (2022). The National Interests and Sustainability of State-Owned Banks in Indonesia. Malaysian Journal of Social Sciences and Humanities, 7(11), e001988. https://doi.org/10.47405/mjssh.v7i11.1988

Rigdon, E. E., & Hoyle, R. H. (1997). Structural Equation Modeling: Concepts, Issues, and Applications. In Journal of Marketing Research (Vol. 34, Issue 3, p. 412). https://doi.org/10.2307/3151904

Roch, F. (2019). The adjustment to commodity price shocks. Journal of Applied Economics, 22(1), 437–467. https://doi.org/10.1080/15140326.2019.1665316

Sugandi, E. A. (2022). Indonesia’s Financial Markets and Monetary Policy Dynamics Amid the COVID-19 Pandemic. In Asia-Pacific Financial Markets (Vol. 29, Issue 3). Springer Japan. https://doi.org/10.1007/s10690-021-09354-4

Thammarak, M. (2016). Central Banking Theory and Pratice in Sustaining Monetary and Financial Stability. In wiley (Vol. 1, Issue 1). http://www.biblioteca.pucminas.br/teses/Educacao_PereiraAS_1.pdf%0Ahttp://www.anpocs.org.br/portal/publicacoes/rbcs_00_11/rbcs11_01.htm%0Ahttp://repositorio.ipea.gov.br/bitstream/11058/7845/1/td_2306.pdf%0Ahttps://direitoufma2010.files.wordpress.com/2010/03/emi

Tobal, M., & Menna, L. (2020). Monetary policy and financial stability in emerging market economies. Latin American Journal of Central Banking, 1(1–4), 100017. https://doi.org/10.1016/j.latcb.2020.100017

Ulrich, B. (2007). Monetary policy implementation. In CESifo DICE Report (Vol. 5, Issue 3). https://doi.org/10.1093/oso/9780199229956.003.0029