A Time-Series Analysis of Indonesia’s Economic Growth: The Roles of FDI, Trade, and Exchange Rate

Abstract

This study investigates the effects of Foreign Direct Investment (FDI), trade, and exchange rates on Indonesia’s GDP from 1970 to 2022. The research uses the Error Correction Model (ECM) and other statistical tests, like the unit root test, cointegration test, and Granger causality test, to examine both short-term and long-term relationships. The results reveal that while GDP, FDI, trade, and exchange rates are strongly linked in the long run, only trade necessarily influences FDI in the short term. The study further confirms that investment and trade are key drivers of economic growth, with exchange rate stability playing a supporting role. Policymakers should focus on boosting FDI, strengthening trade, and ensuring exchange rate stability for sustained growth.