Interest Rates and Money Supply: Implications for Price Stability in Indonesia

Abstract

This study examines the influence of monetary policy represented by interest rates (BI7DRR) and money supply (M2) on price stability (inflation) in Indonesia from 2015 to 2024 using the Autoregressive Distributed Lag (ARDL) approach. Monthly data from Bank Indonesia and Statistics Indonesia were analyzed using the ARDL. The empirical results indicate that neither interest rates nor money supply have a statistically significant short-term effect on inflation at the 5% level. Inflation dynamics are instead strongly dominated by past inflation, as indicated by the highly significant coefficient of the lagged inflation variable. These findings suggest that short-term inflation in Indonesia is primarily driven by its own persistence rather than by monetary policy instruments. Diagnostic tests confirm that the model satisfies classical assumptions, with no evidence of autocorrelation, heteroscedasticity, or non-normality in the residuals. The results highlight the importance of managing inflation expectations and addressing structural factors beyond monetary aggregates and policy rates for achieving effective price stability in Indonesia.