Title: Application of Vector Error Correction Model on Inflation and Gross Domestic Product
Authors: Suliyanto, Dita Amelia, Muhammad Alvito Dzaky Putra Yuniar, Alda Fuadiyah Suryono
Volume: 9
Issue: 1
Pages: 30-39
Publication Date: 2025/01/28
Abstract:
Inflation and Gross Domestic Product (GDP) are key macroeconomic indicators that reflect the economic condition of a country. This study aims to analyze the factors that influence inflation and GDP in Indonesia using the Vector Error Correction Model (VECM) approach. This method is chosen to accommodate time series data that are not stationary but have a cointegrating relationship. This study uses quarterly secondary data from 2015 to 2023, including various variables such as inflation, export value, import value, interest rates, and GDP. The results show that inflation and GDP have a significant influence in both the short and long run. In addition, imports and interest rates have a significant impact on GDP, while exports show no significant effect. Granger Causality testing reveals a unidirectional relationship between imports, exports, and interest rates, where interest rates can predict exports and imports. Impulse Response Function (IRF) analysis shows the dynamic interaction between inflation and GDP, where both show a complex response to disturbances in a given period. Variance Decomposition shows that the effect of GDP on inflation increases gradually, reflecting the increasingly strong relationship between these two variables. This study highlights the importance of managing stable inflation and inclusive economic growth to support sustainable development. The results of this study can serve as a basis in formulating economic policies that support macroeconomic stability in Indonesia.