The Impact of Debt on Economic Growth: A Case Study of Indonesia

The paper is the first attempt to analyse the impact of debt on economic growth in the context of Indonesia by combining the application of wavelet and non-linear techniques. Our results tend to indicate that there are complex lead-lag dynamic interactions between external debt-to-GDP ratio and GDP growth. Debt is shown to be inversely related with economic growth in a shorter scale, while it is not in the longer scale. Nonetheless, positive contribution of debt on economic growth is very restricted as it only occurs as the country stops borrowing more debt. Perhaps, this result confirms that Indonesia is one of the examples of "debt intolerance" countries. Therefore, our recommendation to the policy makers would be for a shift to risk-sharing system which shields the economy from any adversity resulting from interest-bearing system and hence spurs the economic growt