What drives economic growth sustainability? Evidence from Indonesia

Abstract

This paper analyzes the determinants of economic growth sustainability in Indonesia. Based on annual data 1971-2017, this research applies the vector error correction model (VECM) to estimate the dynamic effects of the inflation rate, tax ratio, government spending, broad money, and exchange rate on economic growth. The findings present the existence of long-run equilibrium in a set of those variables. Specifically, the price level and fiscal policy have positive impact on economic growth sustainability. We also find that the effect of monetary policy on economic growth is neutral. The monetary authority should strengthen the impact of monetary variables on economic growth. The exchange rate is part of international factors that threats the economic growth sustainability. It implies that economic growth sustainability is closely related to the international financial sector. Therefore, the central bank should control the exchange rate variable at the safety level to maintain economic growth sustainability.