Managing a Country’s Sustainabilty - The Case of Malaysia and Indonesia Public Debt

Abstract

The study is driven by the motivation to examine the effects of policy interest rates and crude oil prices on Malaysian and Indonesian government borrowing within the framework of Keynesian macroeconomic theory. Using Autoregressive Distributed Lag (ARDL) model as an estimation tool over the observed period from March 2013 till June 2018, the study uncovers the absence of long-term equilibrium relationship between government borrowings and the two explanatory variables. However, based upon Error Correction Representation via ARDL model, there is a significant long-run relation (at 10% level) between Indonesian government borrowing and the two tested variables. Interestingly, this is not the case for Malaysia over both long-run and short-run relations. With respect to the short-run dynamics, there is a unidirectional causality running from crude oil price to Indonesian government borrowing. It seems crude oil price plays a significant role in influencing Indonesian government’s choice of public financing. As expected, the short-term policy rate has no significant bearing on government borrowings at all.