Keynes’s View Versus Solow (A Case Study in Indonesia

Abstract

This research is aimed to determine the debate between Solow Growth Model and Keynes Hypothesis in the Indonesia. There are three (3) variables which are considered in this study, i.e.: Saving, Gross Domestic Product (GDP) and Foreign Direct Investment (FDI). The data are annual data from 1980 to 2012 which are all accessed from the official website of the International Monetary Fund (IMF). The result of Stationary test indicates that most of the variables which are considered in the stationary research are on 1st-degree difference. Whereas, the result of Moderate Multivariate Co-integration Test Result (Johansen Co-integration Test), indicate that there are at least two vectors are co-integrated in the long run. The results of the study by Toda-Yamamoto Causality (Modified Wald) Test Result shows that, Indonesia is more inclined to agree with the theory which is presented by Keynes i.e. in the case of Indonesia, GDP has the potential to encourage saving growth (Saving), therefore it can be concluded that saving rate in Indonesia is influenced by GDP and FDI. The result which has been found in this research is in accordance with the findings of other researchers i.e.: Abu (2010) in Nigeria, Waithima (2008) and Olajide (2009). It is expected that after this research has been conducted, some policies which can be developed to encourage the Indonesian economy will be concluded. From these result, the government may consider policy that favor to the presence of Foreign Direct Investment in Indonesia.

Keywords: Foreign Direct Investment , Gross Domestic Product , Saving, Cointegration and Toda-Yamamoto Causality Test