Did Monetary Policy Stabilize Inflation during the COVID-19 Pandemic? Evidence from Indonesia

Abstract

This study examines the relationship between monetary policy and inflation in Indonesia during the COVID-19 period, from March 2020 to June 2023, over the short and long term. It focuses on how interest rates, money supply, and exchange rates influence inflation and identifies which factor is most effective. Using Indonesian monthly time-series data, the analysis employs econometric methods, including an error correction model, to assess stationarity, long-term relationships, and cointegration. The results show that the exchange rate is the most influential driver of inflation in both the short and long run, while interest rate policy is less effective, especially during crises. These findings challenge the conventional view that interest rate adjustments alone can stabilize inflation, emphasizing the critical role of exchange rate management. The study also finds that changes in the exchange rate begin to affect inflation within five periods, indicating a rapid short-term transmission. Overall, this research underscores the importance of coordinated monetary and exchange rate policies to maintain price stability and economic resilience in Indonesia, especially during crises.