Estimation of Inflation Threshold of Indonesia and Its Effect on Economic Growth Periode 1981-2019

Abstract

Sustainable economic growth with a low and stable inflation rate is one of the goals of macroeconomic policy in improving people's welfare. High inflation can be detrimental to economic growth in the medium and long term, while a certain level of inflation is needed to move the economy. Therefore, the question arises about the level of inflation that does not have a negative impact on economic growth. This study aims to estimate the inflation threshold level and identify its effect on Indonesia's economic growth 1981-2019. The research begins by determining the best model among the models that regress inflation on economic growth with quadratic regression, Hansen's (2000) threshold regression, and Mubarik's (2005) threshold regression (2005). The best model is the Mubarik threshold regression model (2005) with an inflation threshold of 6.85 percent. Mubarik's (2005) threshold regression analysis was reused in the model involving the FDI variable, the inflation threshold was 7.11 percent, and FDI had a positive effect. Inflation below the inflation threshold encourages economic growth, while inflation above the inflation threshold is detrimental to economic growth. The result of the estimated threshold level is higher than the inflation target by BI, so that inflation targeting can be increased.