Abstract:   This paper analyzed long term and short term relationships between public debt service and GDP in Indonesia by applying cointegration analysis of time series model from 1980 - 2005. These relationships used an extended production function model that measured GDP as a function of debt service, capital stock, labor and human capital in which all data are represented by constant local currency unit, Rupiah. The result show that Indonesia faces a debt overhang problem in the long run since increasing the public external debt service slows economic growth. One percent increases in debt service, elasticity of GDP will decrease by 0.13 percent. Labor and capital stock are the main variables to support GDP in the long run period. Moreover, elasticity of GDP to human capital shows relatively small by 0.08 percent. The results of the short run equation show that the change of capital stock is a significant variable in boosting economic growth. However, the variable of external debt repayment showed insignificant in relation to depressing GDP. It means that during the short run period Indonesia may not face debt overhang phenomenon.

Keywords:   Public Dept. Service, GDP, Capital Stock, Human Capital

Publisher:   ILMA UNIVERSITY

Published:   10 December 2008

Issue:   Issue 2 : Volume 4

E-ISSN:   2409-6520

P-ISSN:   2414-8393