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The Impact of Monetary Policy and Capital Flows on Economic Growth in Indonesia

Author

Listed:
  • Anas Iswanto Anwar

    (Hasanuddin University)

  • Muh Akram Pratama Amir

    (Hasanuddin University)

Abstract

This study investigates the dynamic influence of monetary policy and international capital flows on Indonesia’s economic growth amidst the challenges of global integration. Utilising an Autoregressive Distributed Lag (ARDL) framework with time series data from 1990 to 2024, the research integrates money supply, inflation, real interest rates, exchange rates, Foreign Direct Investment (FDI) and portfolio investment into a unified dynamic model. The empirical findings reveal a heterogeneous impact structure. In the short run, monetary expansion, elevated real interest rates and exchange rate depreciation tend to suppress growth, whereas capital flows exhibit cyclical fluctuations. Crucially, the long-run analysis demonstrates that monetary variables remain the dominant determinants, where excessive liquidity, high interest rates and currency depreciation exert significant negative effects. Conversely, moderate inflation positively supports growth, while foreign capital inflows fail to demonstrate a statistically significant structural contribution. These results highlight that monetary stability serves as the primary engine of Indonesian economic resilience, while the potential of foreign capital remains constrained by structural limitations. Consequently, the study advocates for reinforced monetary policy coordination and stable exchange rate management alongside strategic reforms to optimise the quality of foreign investment for sustainable development.

Suggested Citation

  • Anas Iswanto Anwar & Muh Akram Pratama Amir, 2026. "The Impact of Monetary Policy and Capital Flows on Economic Growth in Indonesia," Advances in Economics, Business and Management Research,, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6239-709-5_121
    DOI: 10.2991/978-94-6239-709-5_121
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    JEL classification:

    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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