Abstract:
This study aims to examine the effect of investment and consumption spending on Indonesia’s economic growth. The data used is the quarterly time series data from the first quarter of year 2003 to the fourth quarter of year 2013, comprising consumption spending, investment and economic growth. For the purpose of analysis, the autoregressive distributed lag (ARDL) model is used. The result of the study reveals that there are long-run and short-run effects of consumption spending on economic growth. Meanwhile, the effect of investment on economic growth is not significant. The study also reveals that the increase in government spending on economic growth is 1.88% if the consumption spending rises by 1%.
Machine summary:
This study aims to examine the effect of consumption and investment on the economic growth of Indonesia using quarterly time series data over the period of 2003Q1 to 2013Q4.
The long-term coefficients are derived from equation (2) when variables of consumption spending, investment and economic growth are in equilibrium: ���� = �2 + ∑� �2� ������−� + ∑� �2� ����−�� �=0 �2� �����−� + �2 (2) where �2 , �2� (� = 1, 2, … , �) , �2� (� = 0, 1, … , �) , �2� (� = 0, 1, … , �), �2 are error terms, and p, q, r are the length of time lag.
Therefore, if the long-term coefficients are statistically significant, then it is said there is an effect of consumption and investment spending on economic growth (Murthy and Okunade, 2016).
If the coefficients of equation (4) are statistically significant, then it is said there is a short-term effect of investment and consumption spending on economic growth.
If we compare this statistic value with the criterion value or the upper bound value I(1) (3,585) then at the level of significance of 10% there is a cointegration relationship between variables of investment and consumption spending as well as economic growth.
To determine the effect of investment and consumption spending on economic growth, ARDL model is used.
The result of analysis using ARDL bound approach indicates that there is cointegration between consumption spending, investment and economic growth.