Monetary Stability and Indonesian Economic Growth: an Empirical Vector Errors Correction Model (Vecm) Approach

Abstract

This study aims to analyze the effects of inflation, interest rates, money supply, and exchange rates on Indonesia's economic growth during the 2011–2025 period. The research employed a quantitative explanatory approach using secondary data obtained from Statistics Indonesia (BPS), Bank Indonesia (BI), and the World Bank. Data were analyzed using the Vector Error Correction Model (VECM) to examine both short-run and long-run relationships. In addition, Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analyses were conducted to evaluate the dynamic responses and relative contributions of monetary variables to economic growth. The findings indicate that, in the long run, interest rates, inflation, and exchange rates significantly influence economic growth, while the money supply does not have a significant long-run effect. In the short run, money supply and exchange rates exert a more dominant influence on economic growth. The IRF results reveal that economic growth gradually returns to equilibrium following monetary policy shocks, whereas the FEVD results demonstrate that money supply and exchange rates contribute the largest share to the forecast error variance of economic growth. These findings imply that effective monetary policy should be complemented by coordinated fiscal policy to maintain macroeconomic stability and promote sustainable economic growth.