Analysis of the Effect of Macroeconomic Indicators on Indonesia’s Economic Growth in Open Economy

Openness serves as the first framework for most countries to consolidate their strengths and weaknesses. The primary objective of this study was to examine the impact of the gross domestic product (GDP), inflation, and money supply on Indonesia. This study employs a simultaneous equation model and is calculated using a Two-Stage Least Square method. The data represents yearly observations spanning from 1991 to 2021. The factors influencing the rate of economic growth include government expenditure, domestic inflation disparity, the disparity between the BI Rate and The FED Rate, money supply, exchange rate, and unemployment. The findings of the study on the initial model indicate that the government expenditure variable, as well as the economic growth in the preceding period, have a favourable impact on the economic growth in Indonesia. The variable representing the interest rate of the Bank Indonesia (BI) has a detrimental impact on the economic growth of Indonesia. Conversely, the Indonesian inflation variable and the exchange rate have little impact on economic growth in Indonesia. The second model demonstrates a positive correlation between inflation in Indonesia and three variables: the exchange rate, the money supply in the preceding period, and the current money supply. In Indonesia, the variable of economic growth exerts a detrimental impact on inflation. Government expenditure and the unemployment rate do not exert any influence on inflation in Indonesia.