Inflation as a Mediating Channel between Monetary and Fiscal Policy and Economic Growth in Indonesia: A Time-Series Analysis (2000–2025)

Abstract

This study examines the relationship between monetary policy, fiscal policy, inflation, and economic growth in Indonesia during 2000–2025. The analysis focuses on whether inflation acts as a mediating channel through which the exchange rate, interest rate, and government expenditure are associated with economic growth. Annual secondary data were obtained from national macroeconomic sources and analysed using ordinary least squares regression with heteroscedasticity- and autocorrelation-consistent Newey-West standard errors. The study applied a mediation framework supported by the Sobel test and included a dummy variable to control for the economic contraction associated with the COVID-19 shock in 2020. The descriptive results show that Indonesia experienced substantial variation in exchange rates, interest rates, government expenditure, inflation, and growth during the study period. The regression results indicate that the exchange rate has a significant negative association with both inflation and economic growth. The interest rate is positively associated with inflation but does not have a significant direct association with growth. Government expenditure is positively associated with both inflation and economic growth. Inflation is also positively associated with economic growth in the estimated model. The mediation results suggest that inflation significantly mediates the relationship between the interest rate and economic growth, while no significant mediation effect is found for the exchange-rate or government-expenditure pathways. These findings indicate that the inflation channel is particularly relevant to understanding the link between interest-rate movements and growth outcomes in Indonesia. However, the results should be interpreted as statistical associations within the selected model, given the limited annual sample and the time-series properties of the variables.