Macroeconomic Determinants of Fiscal Risk in Indonesia: Evidence from an ARDL Approach

Research Originality — Many studies identify the effect of macroeconomic dynamics on government debt by using cross-country data. However, such approach often fails to fully explain country-specific characteristics. To address the gap, this research focuses on Indonesia by assessing the effect of macroeconomic volatility on its fiscal sustainability involving a dataset that spans the periods of major economic shocks, including the global financial crisis and the COVID-19 pandemic. Research Objective — This paper focuses on empirically investigating the effect of GDP growth, inflation, and exchange rate fluctuations on government debt as a measure of fiscal risk in Indonesia. Research Methods — This research used annual data from 1993 to 2024. The fiscal risk in this study was measured from government debt as the dependent variable. It also used the economic growth, inflation, and USD/IDR exchange rate as the independent variables of the macroeconomic parameters. The ARDL method was used by the researchers to illustrate the relationship between variables in both the short-term and the long-term. Empirical Results — The findings show that in the long-term, economic growth and inflation will reduce government debt, whereas exchange rate depreciation will increase it. Meanwhile, in the short-term, only inflation and exchange rate will affect government debt. Implications — The result of the research provides empirical evidence to support policymakers in formulating the policy to manage fiscal sustainability during macroeconomic shocks. These findings can also support the government in developing scenario analyses across different macroeconomic conditions.