The Impact of Inflation, Interest Rates, and Exchange Rates on Economic Growth in Indonesia

Abstract

This study examines the impact of inflation, interest rates, and exchange rates on Indonesia’s economic growth using annual time-series data from 2000-2023. The purpose of this research is to analyze whether these key macroeconomic variables significantly influence GDP growth and to determine which factor contributes most to economic fluctuations in Indonesia. The analysis employs the Ordinary Least Squares (OLS) method. The regression results show that inflation has a negative and significant effect on economic growth, indicating that rising price levels reduce purchasing power and weaken economic performance. Interest rates also display a negative and significant relationship with growth, suggesting that higher borrowing costs suppress investment and consumption. Meanwhile, the exchange rate has a negative and significant impact, implying that currency depreciation increases production costs and disrupts economic activity. The findings highlight that macroeconomic instability particularly high inflation, elevated interest rates, and exchange rate depreciation tends to reduce Indonesia’s economic growth. These results emphasize the importance of maintaining price stability, supporting investment-friendly interest rate policies, and ensuring exchange rate stability to strengthen long-term economic performance.