Abstract
This study aims to examine the causality and role as the variables of the financial sector deepening with economic growth in Indonesia. The test of causality in this research acres using heading Granger Causality Test and VECM test. The tests are conducted using annual data from 1986 to 2015. The result of research using heading Granger Causality shows that there is no causality between M2 ratio with economic growth. While the ratio of private credit by deposit money banks and gross fixed capital formation ratio has a one-way causality with economic growth. The ratio of total outstanding international debt securities with economic growth has bidirectional causality. Based on the results of VECM in the long run, the ratio of private credit by deposit money bank has a negative effect on economic growth and the ratio of total outstanding international debt securities has negative effect and not significant on GDP.
Highlights
IntroductionThe result of research usingheading Granger Causality shows that there is no causality between M2 ratio with economic growth
This study aims to examine the causality and role as the variables of the financial sector deepeningwitheconomic growth in Indonesia
Vector Error Correction Models (VECM) estimation results in the long run shows that the variable ratio of money supply, private credit by deposit money banks ratio, and the ratio of gross fixed capital formation has influence long-term economic growth
Summary
The result of research usingheading Granger Causality shows that there is no causality between M2 ratio with economic growth. While theratioof private credit by deposit money banks and gross fixed capital formation ratio has a one-way causality with economic growth. The ratio of total outstanding international debt secu rities with economic growth has bidirectional causality. Based on the results of VECM in the long run, the ratio of private creditbydepositmoney bank has a negative effect on economic growth and the ratio of total outstanding international debtsecuritieshas negative effect and not significant on GDP. On demand-following hypothesis States that every effort is beginning to develop the financial markets may lead to a waste of resources that could be allocated to more useful purposes in the early stages of growth.
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