The Effect of Interest Rate, Inflation and Government Expenditure on Economic Growth in Indonesia Period of 2005-2012

Abstract

This study analyzed the effect of interest rates, inflation rates and government spending on economic growth in Indonesia during 2005 to 2012. By using the method of data analysis panel, overall the independent variables namely interest rate, inflation rate and government spending has a 99% influence on the dependent variable of economic growth. The results of this research is government spending has a positive significant to economic growth. It means that government spending has an effect on economic growth, according to Keynesian theory. Variable interest rate has a significant negative to economic growth, it means that the interest rate effect on economic growth. If the central bank decrease the interest rate, then the investment will be increase, and it means economic growth will also increase. While the rate of inflation also affect economic growth, inflation has a significant positive to economic growth, because the inflation rate in Indonesia is relatively low, it is below 10% and stable.

Keywords: interest rate, inflation, government expenditure, economic growth