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

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.

The results indicated that interest rate 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 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 interest rate in line with stock price movements.

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.