Rethinking Indonesia's Public Debt in the Era of Negative Interest Rate-Growth Differentials

TL;DR

This paper examines how negative interest rate-growth differentials influence Indonesia's public debt dynamics, revealing that higher debt increases economic volatility and welfare risks, challenging traditional fiscal assumptions.

Contribution

It applies modified Blanchard (2019) models to Indonesia, demonstrating that negative interest-growth differentials can lead to increased volatility and welfare risks, contrary to prior beliefs.

Findings

Higher public debt increases economic volatility.

Lower initial endowment diminishes debt benefits.

Debt explosion threats reduce societal welfare.

Abstract

This study contributes to the discussion about how higher public debt may not be costly because of the negative interest rate-growth differentials by simulating OLG models introduced by Blanchard (2019) under uncertainty, showing debt and welfare dynamics in two scenarios: intergenerational transfers and debt rollovers in the case of Indonesia. The simulation is done by modifying the model parameters based on interest rate-growth differentials historic data from 2004-2019. It is found that the fiscal consensus does not hold when implementing Blanchard (2019) analysis with Indonesian-based rate parameters. Increasing public debt makes the economy more volatile and high risk. Modifying other factors supports the initial finding, with lower initial endowment diminishing the benefits of public debt and higher capital share under Cobb-Douglas. When the threat of debt explosion appears, efforts to reduce debt share will reduce the welfare of the society. The policy implication is to be careful of the opportunity. Increasing public debt may not be the way to go, avoiding possible dire consequences.