The impact of inflation on indonesia's economic growth

  • Suci Aprilia 
    Faculty of Economics and Business, Universitas Negeri Padang, Indonesia
    Indonesia
  • Doni Satria
    Faculty of Economics and Business, Universitas Negeri Padang, Indonesia
    Indonesia

Abstract

This study examined the non-linear effect of inflation on provincial economic growth in Indonesia. Most existing evidence relied on national time series, leaving provincial heterogeneity unexplored. Secondary panel data from 34 provinces were analyzed using a quadratic panel regression estimated via the Fixed Effect Model. The model included investment, labor, trade openness, and government expenditure as control variables. The results indicated that inflation had a positive and significant effect on growth, while squared inflation exerted a negative and significant impact, confirming an inverted U-shaped relationship. The optimal inflation threshold was estimated at approximately 4.25 percent, beyond which inflation hindered regional growth. Among the control variables, only trade openness significantly influenced growth. These findings suggested that the central bank monetary policy target range remained growth-supportive, though with limited flexibility at the upper bound. Policymakers should integrate inflation control with supply-side interventions while prioritizing the productive quality of public spending and investment to maintain regional economic momentum.

Keywords
  • Inflation, Economic growth, Threshold inflation, Nonlinear panel data, Indonesia
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