The Mediating Role of Investment: Analyzing the Causal Impact of Inflation on Economic Growth and the Influence of Capital Expenditure

Aims: This paper aims to test the impact of inflation and capital expenditure on regional growth of economy employing the investment as a mediating variable in Central Java from 2017 to 2022.

Study Design: The population of this research is 35 districts or cities in Central Java Province for 2017–2022 period. This paper uses secondary data or quantitative approach taken from the Statistics Central Bureau.

Methodology: The method used to collect data is purposive sampling with data analysis using the Structural Equation Modeling model. Data is processed through the Smart PLS 4.0 program applying Structural Model analysis (Inner Model) as an analysis technique of data.

Results: The findings of this paper suggest that: (1) Inflation had no effect significantly on growth of economy. (2) Investment level had an effect positively on growth of economy. (3) Inflation had an effect negatively on the investment. (4) Investment had an effect significantly in mediating the causality of the inflation to growth of economy. (5) The capital expenditure had an effect positively on growth of economy.