The Impact of Monetary Policy and Capital Flows on Economic Growth in Indonesia

Anas Iswanto Anwar () and Muh Akram Pratama Amir
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Anas Iswanto Anwar: Hasanuddin University
Muh Akram Pratama Amir: Hasanuddin University

A chapter in Proceedings of the 10th International Conference on Accounting, Management, and Economics (10th ICAME 2025), 2026, pp 1725-1747 from Springer

Abstract: Abstract This study investigates the dynamic influence of monetary policy and international capital flows on Indonesia’s economic growth amidst the challenges of global integration. Utilising an Autoregressive Distributed Lag (ARDL) framework with time series data from 1990 to 2024, the research integrates money supply, inflation, real interest rates, exchange rates, Foreign Direct Investment (FDI) and portfolio investment into a unified dynamic model. The empirical findings reveal a heterogeneous impact structure. In the short run, monetary expansion, elevated real interest rates and exchange rate depreciation tend to suppress growth, whereas capital flows exhibit cyclical fluctuations. Crucially, the long-run analysis demonstrates that monetary variables remain the dominant determinants, where excessive liquidity, high interest rates and currency depreciation exert significant negative effects. Conversely, moderate inflation positively supports growth, while foreign capital inflows fail to demonstrate a statistically significant structural contribution. These results highlight that monetary stability serves as the primary engine of Indonesian economic resilience, while the potential of foreign capital remains constrained by structural limitations. Consequently, the study advocates for reinforced monetary policy coordination and stable exchange rate management alongside strategic reforms to optimise the quality of foreign investment for sustainable development.

Keywords: Monetary Policy; Capital Flows; M2; Inflation; Real Interest Rate; Exchange Rate; Foreign Direct Investment (FDI); Portfolio Investment; ARDL; Indonesia’s Economic Growth (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-709-5_121

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DOI: 10.2991/978-94-6239-709-5_121

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