The Effect of GDP, Inflation, Interest Rate, and Exchange Rate on Household Consumption in Indonesia: A Time Series Analysis Based on Maqashid Shariah Perspective with ECM Approach

Abstract

This study aims to analyze the effect of Gross Domestic Product (GDP), inflation, interest rates, and the exchange rate on household consumption in Indonesia for long-run perspectives (2005-2024), while incorporating the framework of Maqashid Shariah. In Islamic economics, consumption is not solely driven by income and price factors, but is also expected to reflect the attainment of maslahah (social welfare), moderation, and ethical values. This research employs annual time series data covering the period 2005–2024 and utilizes the Error Correction Model (ECM) approach. The ECM method is applied due to the non-stationary characteristics of the variables at the level and the existence of a potential long-term equilibrium relationship (cointegration). The empirical results indicate that GDP has a positive and significant effect on household consumption in both the short and long run, suggesting that increased income enhances consumption capacity. Inflation exerts a negative effect in the short run, reflecting reduced purchasing power and potential welfare deterioration. Meanwhile, interest rates and the exchange rate show negative influences in the long run, indicating that higher financial costs and currency depreciation may constrain sustainable consumption behaviour. The Error Correction Term (ECT) is found to be negative and statistically significant, confirming the existence of a long-term equilibrium and the system’s ability to adjust toward it. From a Maqashid Shariah perspective, these findings imply that macroeconomic instability can hinder the achievement of maslahah-oriented consumption, emphasizing the need for economic policies that promote stability, fairness, and ethical consumption in line with Islamic principles.