The Impact of Foreign Investment, Inflation, and Carbon Tax on Economic Growth in Indonesia

Abstract

One of the main indicators of a country's ability to improve the welfare of its people is its economic growth. However, various macroeconomic factors influence its value. Inflation and Foreign Direct Investment (FDI) have the potential to affect economic stability, while carbon dioxide (CO₂) emissions reflect sustainability aspects that also have a long-term impact. This study aims to analyze the effect of inflation, FDI, and CO₂ emissions on Indonesia's Gross Domestic Product (GDP) in the short and long term. The data used is time series data from 1993 to 2024 with a quantitative approach. The analysis was conducted using multiple linear regression to test partial and simultaneous effects, as well as the Vector Error Correction Model (VECM) method to evaluate long-term relationships and short-term adjustments. Stationarity and cointegration tests were conducted as preliminary steps prior to model estimation. Long-term estimation results show that inflation has a significant negative effect on GDP with a coefficient of –0.0199 and FDI also has a significant negative effect with a coefficient of –1.1383, while CO₂ emissions have no significant effect. The error correction term value of –0.8852 indicates that short-term imbalances will be corrected towards long-term equilibrium by 88.5% each period. This study emphasizes the importance of macroeconomic policies that can reduce inflation and improve the quality of sustainable foreign investment so that Indonesia's economic growth can be maintained in a stable manner while paying attention to environmental aspects