THE RELATIONSHIP BETWEEN INFLATION AND BI RATE IN INDONESIA USING GRANGER CAUSALITY ANALYSIS APPROACH

Abstract

As a developing country, Indonesia is not immune to various economic problems such as inflation. In overcoming economic problems, Bank Indonesia, as the central bank, can implement various forms of monetary policy, particularly regarding interest rate adjustments and inflation. Bank Indonesia, as the central bank, has developed various monetary policies such as the Inflation Targeting Framework and BI Rate, which serve as signals for commercial banks in setting their respective interest rates, ultimately stabilizing the economy. The purpose of this study is to analyze the Granger causality between inflation and the BI rate. The data collection technique used in this study is secondary data obtained from Bank Indonesia using monthly data over five years for the inflation and BI rate variables. Hypothesis testing was conducted using the unit root test, determination of the optimal lag, and the Granger causality test. The results of this study indicate that the unit root test results show that inflation and the BI rate are stationary at the first difference level, then the optimum lag is at the lag 2 level, and the results of the Granger causality test show that inflation affects the BI rate in Indonesia in 2017-2023, then the BI rate affects inflation in Indonesia in 2017-2023. This indicates that there is a causal relationship between inflation and the BI rate.