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Threshold Effect In The Relationship Between Inflation Rate And Economic Growth In Indonesia

Author

Listed:
  • Adam Luthfi Kusumatrisna

    (IPB University)

  • Iman Sugema

    (IPB University)

  • Syamsul H. Pasaribu

    (IPB University)

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.

Suggested Citation

  • Adam Luthfi Kusumatrisna & Iman Sugema & Syamsul H. Pasaribu, 2022. "Threshold Effect In The Relationship Between Inflation Rate And Economic Growth In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(1), pages 117-132, June.
    • Handle: RePEc:idn:journl:v:25:y:2022:i:1g:p:117-132
    DOI: https://doi.org/10.21098/bemp.v25i1.1045
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic growth; Inflation; Threshold effect; Indonesia.;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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