This
research investigates the impact of interest rates and exchange rates on
inflation levels in Indonesia during the period from 2017 to 2022. This
research will be using Monetary Interest Rates Growth and Exchange Rates Growth
as proxy for the variable Interest Rates and Exchange Rates. Utilizing an Error
Correction Model (ECM), our empirical strategy reveals that the results do not
align with the initial hypotheses: Interest Rates (IR) have a positive but
insignificant effect on Inflation in both the short and long run in Indonesia,
while the variable Exchange Rates (FX) also show a positive but insignificant
effect in the short term and a negative but insignificant effect in the long
term. These findings are consistent with prior research by Amhimmid et al.
(2021) and Roperto et al. (2021), highlighting the need for central banks in
these countries to focus on reducing inflation uncertainty through effective
monetary policy to achieve price stability and sustainable economic growth.
Policymakers should monitor inflation volatility and be ready to adjust
interest rates to mitigate the negative effects of interest and exchange rate
fluctuations on the economy. While this study offers valuable insights into the
interest rate determination process in Southeast Asia, further research across
a broader panel of countries could enhance understanding of the complex
interactions among these variables, providing critical implications for macroeconomic
stability.
