Do Macroeconomic Variables Influence Real GDP in Indonesia? Evidence From a Vecm Approach

Abstract

This study examines the dynamic relationships between selected macroeconomic variables and real GDP in Indonesia using an annual time-series approach. The study focuses on inflation, interest rates, the exchange-rate level, and government expenditure. Annual secondary data covering 2005–2023 were obtained from Statistics Indonesia (Badan Pusat Statistik) and Bank Indonesia. The analysis employs the Vector Error Correction Model (VECM) to examine short-run dynamics and long-run equilibrium relationships after conducting unit-root and Johansen cointegration tests. The Augmented Dickey-Fuller test indicates that all variables are integrated of order one, I(1). The Johansen trace test identifies two cointegrating relationships at the 5 percent significance level, supporting a VECM with a cointegration rank of two. The reported normalized long-run estimates for the real GDP equation indicate negative associations for inflation and interest rates and positive associations for the exchange-rate level and government expenditure. In the short run, changes in inflation and interest rates are negatively associated with real GDP, whereas changes in the exchange-rate level and government expenditure are positively associated with real GDP in the estimated equation. The findings suggest that macroeconomic conditions and fiscal policy are closely associated with Indonesia's real GDP level. The study contributes to the empirical literature by providing time-series evidence on short-run dynamics and long-run equilibrium relationships among major macroeconomic variables in Indonesia. The findings provide policy implications for price and financial stability, exchange-rate management, and the effectiveness and productivity of government expenditure, while recognizing the limitations imposed by the small annual sample.