THRESHOLD EFFECT in the RELATIONSHIP between INFLATION RATE and ECONOMIC GROWTH in Indonesia

Abstract

This paper investigated the linear and nonlinear relationships between inflation and economic growth in Indonesia using provincial data from 1994 to 2019. The linear model revealed that inflation has a significant negative effect on economic growth, while the nonlinear model revealed that inflation would negatively affect economic growth only after exceeding a threshold value of 9.59 percent. Excluding a high inflationary structural break, we found an inflation threshold of 5.22 percent. Furthermore, we found that the threshold of inflation rate in the eastern regions of Indonesia was higher than that of the western regions, namely 9.64 percent and 5.75 percent, respectively. These findings have significant implications for inflation targeting and management both at the national and regional levels.