Domestic Public Debt, Gross Domestic Product, and the Crowding-Out Effect: A Case Study in Indonesia
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Crowding Out, Deficit, Domestic Debt, General Government, Government Finance Statistics, Gross Domestic Product
Abstract
Research Originality — Several studies have examined the impact of government debt on Indonesia’s GDP, but few have specifically analyzed the effect of domestic debt. This study addresses that gap by focusing on general government domestic debt securities and loans, measured by creditor’s residency, which is rarely explored in previous research.
Research Objective — This study aims to assess how domestic debt from both central and local governments (general government) affects Indonesia’s GDP and whether it leads to a crowding-out effect on private investment.
Research Methods — The study adopts the error correction model (ECM) to analyze short-term and long-term relationships between variables. The analysis uses quarterly data from Q1 2014 to Q4 2019.
Empirical Results — The results show that the growth of general government domestic debt has a positive and significant impact on Indonesia’s economic growth. Moreover, it does not lead to a crowding-out effect on private investment.
Implications — The general government’s shift toward domestic debt as the primary financing source is appropriate and contributes to reducing insolvency risks. Nevertheless, prudent debt management is crucial, and domestic debt should be optimized for strategic expenditures such as infrastructure, health, and education. Indonesia’s economy is currently operating below its full capacity, thereby providing the general government with room to implement effective long-term economic stimulus measures.
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