Optimal Price Level Under Slowing Economic Performance Using Simple Growth-Inflation Threshold Models

Abstract

The purpose of this study was to evaluate the threshold of inflation that is tolerant of Indonesia’s economic growth rate. The basic question to be answered was what level of inflation is safe enough for economic growth. To answer this question, this study used Indonesian macroeconomic data, specifically data on inflation and economic growth between 1969-2017 sourced from the Central Statistics Agency and Bank Indonesia. The data analysis method used was a threshold regression model that was repeated manually by entering an acceptable inflation simulation value based on inflation experience in Indonesia. The simulation results showed that the inflation threshold that is safe for growth is around 7 to 8 percent per year. However, the model showed that inflation of 3 percent is the optimal level for growth. One concludes that an inflation rate of around 3 percent can be used as a guide in determining the inflation target in Indonesia. Keywords: growth, inflation, stability, threshold