THRESHOLD EFFECT IN THE RELATIONSHIP BETWEEN INFLATION RATE AND ECONOMIC GROWTH IN INDONESIA

Authors

Adam Luthfi Kusumatrisna, IPB University, IndonesiaFollow
Iman Sugema, IPB University, IndonesiaFollow
Syamsul H. Pasaribu, IPB University, IndonesiaFollow

Document Type

Article

Abstract

This paper investigated the linear and nonlinear relationships between inflation and economic growth in Indonesia using provincial data from 1994 to 2019. The linear model revealed that inflation has a significant negative effect on economic growth, while the nonlinear model revealed that inflation would negatively affect economic growth only after exceeding a threshold value of 9.59 percent. Excluding a high inflationary structural break, we found an inflation threshold of 5.22 percent. Furthermore, we found that the threshold of inflation rate in the eastern regions of Indonesia was higher than that of the western regions, namely 9.64 percent and 5.75 percent, respectively. These findings have significant implications for inflation targeting and management both at the national and regional levels.

Recommended Citation

Kusumatrisna, Adam Luthfi; Sugema, Iman; and Pasaribu, Syamsul H. (2022) "THRESHOLD EFFECT IN THE RELATIONSHIP BETWEEN INFLATION RATE AND ECONOMIC GROWTH IN INDONESIA," Bulletin of Monetary Economics and Banking: Vol. 25: No. 1, Article 14.
DOI: https://doi.org/10.21098/bemp.v25i1.1045
Available at: https://bulletin.bmeb-bi.org/bmeb/vol25/iss1/14

First Page

117

Last Page

132

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Country

Indonesia

Affiliation

IPB University