Abstract
Inflation could likely cause devastating impacts where high inflation can harmful economic and social circumstances. However, only limited studies try to find the impact of inflation on the quality of air. The aim of this study is to investigate the empirical linkage between inflation and air pollution in Indonesia covering the period of 1981 until 2017 by using an error correction model (ECM) methodological approach. The result of study suggests that in the short run, higher inflation is causing the lower level of air pollution. Similarly, in the long run, higher inflation is also affecting the lower level of air pollution. While there are a lot of negative impacts of inflation in Indonesia, the finding in this study indicates a positive impact of inflation in Indonesia, which is higher inflation can reduce the air pollution. The results seem contradict with the target of central bank of Indonesia to have a low but positive rate of inflation. Based on the findings, the study suggests the policymakers in Indonesia to support a robust role of inflation stability in achieving targets related to the reduction of air pollution.
Highlights
Indonesia has experienced steady economic growth since the end of the 1998 Asian financial crisis, with the average economic growth are more than 5% per year
This study shows that a higher inflation rate is associated with a lower level of CO2 emission, the protection of the environment through the inflation channel seems complicated because the target of the central bank of Indonesia is to have a low but positive rate of inflation
This study shows that higher inflation contributes to a decline in environmental degradation
Summary
Indonesia has experienced steady economic growth since the end of the 1998 Asian financial crisis, with the average economic growth are more than 5% per year. The non-environmentally friendly economic activities, such as deforestation and excessive fossil fuels usage, have made Indonesia one of the primary greenhouse gas contributors in the world [1]. The rapid increase in greenhouse gas emissions has become one of the world’s leading problems in the last few decades. This has put the awareness of governments, institutions, and researchers to investigate the main contributors of pollution emissions at the macro and micro levels [2 & 3]. Previous studies have acknowledged that economic activities lead to pollution emissions and put various variables such as energy consumption, production, trade, export-import, industrialization, investment, urbanization, and others to find the relationship between these variables and environmental degradation. A country is classified under macroeconomic instability when the country suffers from significant current account deficits, problems with high levels of public debt, galloping or high inflation rates, and stagnant or falling gross domestic product [5]
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