Does inflation affect economic growth? : the relevance of the debate for Indonesia

This research was motivated by the current constraints on macroeconomic policy-making in Indonesia. On the fiscal side, the government is burdened with debt and the pressure to maintain social expenditure. On the monetary side, there is a preoccupation with a lower inflation rate and the need to maintain liquidity in a depressed economy. By examining the inflation-growth relationship, this study examines whether there is any room for inflating the economy. This would ease the pressure on government debt repayment while maintaining social expenditure, and the economic recovery would not be stalled by prematurely tightening monetary policy. The study finds that there is no statistically significant relationship between inflation and growth, and argues for a more expansionary macroeconomic policy mix. It also argues that the conditions for an independent central bank do not exist in Indonesia, and such an institutional arrangement is premature when mechanisms for democratic oversight are not yet in place.