Does inflation or interest rate matter to Indonesian stock prices? An asymmetric approach

Abstract:
Purpose
This paper examines the asymmetric effects of inflation and interest rate on stock prices in Indonesia.

Design/methodology/approach
Variables such as interest rate, inflation rate, gross domestic product (GDP) and exchange rate were tested using the time-series data fitted to the Nonlinear Autoregressive Distributed Lag (NARDL) model. The asymmetric effects of interest rate and inflation rate were estimated in two separate models, with data covering the period from 1997:Q1 to 2023:Q3.

Findings
The results indicated that interest rates exhibit asymmetric effects on stock prices in both the short and long run. Conversely, no asymmetric effect was identified for the inflation rate model. The NARDL result of the asymmetry interest rate model revealed that both positive and negative changes in the interest rate have a negative impact on stock prices in Indonesia. Notably, stock prices were positively and significantly influenced by both economic growth and exchange rate. The results suggested that policymakers should respond more proactively by adjusting the interest rate in line with stock price movements.

Originality/value
This study diverges from previous studies by employing a general equilibrium theoretic model to link output with stock returns and extending it to include macroeconomic variables relevant to stock price determination. This study uniquely examined the asymmetric effects of monetary policy variables in Indonesia, particularly by comparing the asymmetric effects of inflation and interest rate.