Determinants of Inflation in Indonesia: Evidence from Monetary Policy and Fiscal Institutions,

Abstract

Determining inflation through monetary policy and fiscal institutions shows lower inflation in Indonesia than in the United States, as well as a narrower interest-rate gap between Indonesia and the United States. Fiscal instruments are employed to anticipate sudden inflationary shocks, including those arising from government policies, natural disasters, and disruptions to global supply chains—factors beyond the control of Bank Indonesia, the monetary authority. The model used in this study is regression and correlation methods on panel data from 10 Indonesian provinces covering the period from 2000 to 2020. The instruments representing monetary policy are the benchmark interest rate (BI-Rate), Bank Indonesia’s balance sheet, specifically its securities purchases and sales in the financial market; purchases increase assets, while sales decrease them; and imports. The fiscal institution is represented by the National and Regional Inflation Control Teams (TPIN/D). In the process, a stationarity test was first conducted on the data using the Augmented Dickey-Fuller test to ensure that no spurious regression occurred. The findings indicate that the BI Rate, Bank Indonesia’s balance sheet, imports, and TPIN/D simultaneously have a significant effect on inflation. Furthermore, each of these independent variables has a significant and positive effect on inflation, except for imports, which have no influence on inflation.