Debt and Consumption in Indonesia: Ricardian Equivalence Approach

Prasda Ayunasta, Bambang Setiaji, Lukman Hakim

Abstract

Debt is a problem that is often discussed in all countries, especially for countries that are experiencing financial difficulties. The Asian crisis that occurred in 1998 and the global crisis in 2008 had a negative impact especially for Indonesia. This caused Indonesia to carry out foreign debt to save the economy. This research applies the Ricardian Equivalence concept in foreign debt problems in Indonesia. Ricardian Equivalence argues that current government debt will be a burden on public expenditure in the coming year. But assuming that the community behaves rationally, the foreign debt burden will not affect the consumption of the community. This study uses secondary data on household consumption, government foreign debt, gross domestic product, tax revenues, central government expenditures, and government budget deficits with the Impulse Response Function (IRF) method and Variance Decomposition with quarterly data from the first quarter of 1997 - fourth quarter 2017. Overall, if viewed from foreign debt, the Ricardian Equivalence does not apply in Indonesia after the Asian crisis in 1998 because foreign debt has an influence on public consumption. Conversely, after the global crisis in 2008 the Ricardian Equivalence prevails in Indonesia because foreign debt has no influence on public consumption.

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