THE IMPACT OF INTEREST RATES ON ECONOMIC GROWTH WITH MONEY SUPPLY AS A CONTROL VARIABLE

Abstract

This study aims to examine the impact of Bank Indonesia's benchmark interest rate (BI Rate) on Indonesia's economic growth, using money supply (M2) as a control variable. This study is motivated by the tightening global monetary policy environment and existing domestic macroeconomic challenges. This research is based on endogenous growth theory, which highlights the important role of internal economic factors, including monetary instruments in driving long-run economic growth. A quantitative approach is used using multiple linear regression analysis on time series data covering the period 2017-2024. The results show that BI Rate has a positive but statistically insignificant effect on economic growth, while money supply shows a negative and insignificant effect. Classical assumption tests confirmed the absence of multicollinearity and heteroscedasticity, although initial autocorrelation was detected and later resolved through model adjustment. The model only explains 12,6% of the variance in economic growth, indicating the need to include additional, more relevant macroeconomic variables. These findings underscore the limited effectiveness of interest rate policy in driving economic expansion over the period under review, and emphasise the need for a broader, more dynamic and context-sensitive monetary policy framework.