Exploring The Drivers of Inflation in Indonesia: A Quantitative Analysis

Inflation is a crucial macroeconomic indicator that affects various economic variables and requires effective policy responses. In Indonesia, Bank Indonesia plays a central role in maintaining price stability through monetary policy. This ‎study examines the short- and long-term impacts of several macroeconomic variables on inflation using quarterly data ‎from 2009 to 2023, employing the Vector Autoregression (VAR) and Vector Error Correction Model (VECM) approach-‎es. The results show that in the short term, money supply (M1) negatively affects inflation, while interest rates have a ‎positive effect. Other variables, such as exchange rate, GDP, exports, and imports, also exhibit negative effects in the ‎short term. In the long run, M1, GDP, exports, and imports significantly affect inflation, with exchange rate, interest rates, ‎and imports showing a positive relationship. Granger causality indicates a bidirectional relationship between GDP and ‎M1. These findings suggest the importance of controlling money supply, promoting exports, managing imports, and stabilizing the exchange rate. Overall, Indonesia’s inflation control policies appear relatively effective, with the diminishing ‎impact of inflation shocks over time. Further research is encouraged to deepen the understanding of causal relationships ‎among these variables‎.