Analysis of Macroeconomic Variables on the Existence of Inflation in Indonesia Using the Vector Error Correction Model Approach

Abstract

This research investigates the impact of macroeconomic variables, namely money supply,
exchange rate, interest rate, and the joint stock index, on inflation in Indonesia. Employing the
Vector Error Correction Model (VECM) dynamic model approach, the study reveals a long-term
relationship among each variable (Inflation Rate, Jakarta Composite Index, Interest Rate,
Exchange Rate, and Money Supply). Granger Causality Test results indicate a unidirectional
relationship of interest rate and money supply variables to inflation, interest rate to Jakarta
Composite Index, and money supply to the exchange rate. Conversely, there is a bidirectional
relationship between exchange rate and inflation variables. In the short term, Interest Rate
significantly and positively influences inflation, whereas, in the long term, it exhibits a negative
and insignificant effect. Money supply, in the long run, significantly and positively affects the
inflation rate. This study stands out in the macroeconomic literature due to its distinctive choice
of variables and the dynamic model employed.