Inflation and Growth in Indonesia: The Nexus and Threshold
Inflation and Growth in Indonesia: The Nexus and Threshold

Summary/Abstract: The intense discussions on how inflation affects the growth have triggered many studies to empirically investigate it. This paper is not an exception. The previous research in Indonesia focusing on how inflation and growth are correlated, and various thresholds of inflation suggested have provided puzzling indicators. Therefore, this paper aims to examine the impact of inflation on the growth in Indonesia by employing Autoregressive Distributive Lag (ARDL) technique, Threshold Regression(TR), and quadratic regression. ARDL is applied to reveal the nexus in the short-run and long-run whereas the TR and quadratic regression are employed to find the threshold of inflation. In the short-run and long-run time frame, the relationships are found to be a negative interaction between inflation and growth. Moreover, this paper empirically proves that the inflation threshold exists at the level of 14.31% after comparing two different approaches’ results. Eventually, the finding of this paper suggests a room for less tight monetary policy that can be applied.

• Details
• Contents