ANALYSIS OF THE EFFECT OF AMERICAN MONEY (M2), INTEREST RATE, GOVERNMENT EXPENDITURE AND REAL EXCHANGE RATE ON INFLATION LEVEL IN INDONESIA COINTEGRATION APPROACH AND ERROR CORRECTION METHOD (ECM)

Inflation is often used as an indicator of a country's economic stability so that the rate of movement must always be sought at a low and stable level. The purpose of this study is to determine the effect of the money supply (M2), interest rates, government spending and the real exchange rate on the inflation rate in Indonesia in the short and long term. This study uses Error Correction Model (ECM) to analyze multivariate time series data that are non-stationary but co-integration occurs between the variables used in the study. The test results showed that the interpretation of the results of co-integration tests and error-correction methods showed that all independent variables had a significant short-run and long-run equilibrium relationship to the dependent variable. There is a positive relationship between expenditure, interest rate and exchange rate against inflation. But on the contrary there is a negative relationship between the money supply and inflation. This is not in line with the existing theory, there is a research gap and this needs further research on this issue.