ANALYSIS EFFECTS OF INTEREST RATE AND MONEY SUPPLY SHOCKS ON INFLATION IN INDONESIA USING STRUCTURAL VECTOR AUTOREGRESSION (SVAR) MODEL
Keywords:
SVAR, Interest Rate, Money Supply, Inflation, Monetary PolicyAbstract
Inflation is one of the key macroeconomic indicators reflecting a country's economic stability. The effectiveness of these monetary instruments in influencing inflation remains a subject of debate due to the presence of structural and external economic shocks. Therefore, this study aims to examine the dynamic effects of interest rate and money supply shocks on inflation in Indonesia and identify the dominant source of inflation fluctuations. This study employs the Structural Vector Autoregression (SVAR) model using monthly data from May 2016 to March 2026. The variables include the BI Rate as the policy interest rate, broad money (M2) as money supply, and inflation measured by the Consumer Price Index (CPI). The analysis consists of stationarity testing, optimal lag selection, SVAR estimation, Structural Impulse Response Function (SIRF), and Forecast Error Variance Decomposition (FEVD). The estimation results indicate that interest rate shocks significantly reduce money supply, while the direct effects of interest rate and money supply shocks on inflation are not statistically significant. The SIRF analysis shows that the responses of money supply and inflation to monetary policy shocks are temporary and gradually converge to equilibrium. Furthermore, the FEVD results reveal that inflation fluctuations are predominantly explained by inflation's own shocks, whereas the contributions of interest rate and money supply shocks remain relatively small. These findings suggest that inflation dynamics in Indonesia are influenced not only by monetary policy but also by broader structural and external factors.
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