Islamic Vs Conventional Economics, The Impact of Interest Rates on the Indonesian Economy

Abstract

This study investigates the impact of interest rates and the economy in Indonesia as a country with a Muslim population in the world but does not prohibit interest rates in the positive laws of the Republic of Indonesia. The research period for this study is from 1990 to 2020, and we use secondary data that we collect from World Bank data. We use an autoregressive vector model. We found that The lower the interest rate, the more it encourages economic growth and vice versa. Interest rates put pressure on the real sector because interest rates are the cost of capital that weighs on the economy. Low interest rates bring improvement and better economic growth. This proves that interest rates which in Islamic economics are still forbidden have a bad impact on the Indonesian economy.